Appeal Details
Counselvise Citation
[2015] 140 COUNSELVISE.COM (IT) 94424 (ITAT-AHMEDABAD)
Assessee PAN
Bench
Appeal Number
CRN Number
Duration Of Justice
11 month(s) 16 day(s)
Appellant
Respondent
Appeal Type
Income Tax Appeal
Pronouncement Date
11-09-2015
Appeal Filed By
Assessee
Order Result
Allowed
Bench Allotted
C
Next Hearing Date
16-07-2015
Assessment Year
2009-2010
Appeal Filed On
25-09-2014
Judgement Text
, C IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH, AHMEDABAD BEFORE SHRI RAJPAL YADAV, JUDICIAL MEMBER AND SHRI ANIL CHATURVEDI, ACCOUNTANT MEMBER ./ ITA NO.2629 AND 2630/AHD/2014 / ASSTT. YEAR: 2009-2010 AND 2010-11 KIRAN JEWELLERY PLOT NO.28, 59 & 60 SURAT SPECIAL ECONOMIC ZONE SACHIN, SURAT 394 520. VS ACIT, RANGE - 2 SURAT. ./ ITA NO.2858/AHD/2014 / ASSTT. YEAR: 2010-11 ITO, WARD - (4) SURAT. VS KIRAN JEWELLERY PLOT NO.28, 59 & 60 SURAT SPECIAL ECONOMIC ZONE SACHIN, SURAT 394 520. ! / (APPELLANT) '# ! / (RESPONDENT) ASSESSEE BY : SHRI S.N. SOPARKAR WITH SHRI VARTIK CHOKSHI REVENUE BY : SMT.VIBHA BHALLA, DR AND SHRI JIGAR RAWAL, TPO / DATE OF HEARING : 16/07/2015 / DATE OF PRONOUNCEMENT: 11/09/2015 $%/ O R D E R PER RAJPAL YADAV, JUDICIAL MEMBER: COMMON ORDER OF THE LD.CIT(A)-II, SURAT DATED 20.8 .2014 PASSED IN THE ASSTT.YEAR 2009-10 AND 2010-11 IS BEING IMPU GNED BY THE ASSESSEE IN BOTH THE ASSESSMENT YEARS, AND BY THE R EVENUE IN THE ASSTT.YEAR 2010-11. THE ISSUES INVOLVED IN ALL THE SE APPEALS ARE COMMON, THEREFORE, WE HEARD THEM TOGETHER AND DEEM IT APPROPRIATE TO DECIDE THEM BY THIS COMMON ORDER. ITA NO.2629/AHD/2014 (KIRAN JEWELLERY)-3 2 2. THE ASSESSEE HAS TAKEN 10 VERBATIM GROUNDS OF AP PEAL IN BOTH YEARS, EXCEPT, VARIATION IN THE AMOUNTS AND ADDITIO NAL ARGUMENTS IN THE GROUND NO.8.1 IN THE ASST.YEAR 2010-11. THE REVENUE HAS ALSO TAKEN FOUR GROUNDS OF APPEAL. ALL THESE ARE NOT CONSONANCE WITH RULE 8 OF INCOME TAX (APPELLATE TRIBUNAL) RULES, 1963 - THEY ARE ARGUMENTATIVE AND DESCRIPTIVE IN NA TURE. 3. IN BRIEF, THE ISSUES INVOLVED IN ALL THESE APPEA LS ARE WHETHER THE AO HAS RIGHTLY RESORTED TO PROVISIONS OF SECTION 80 IA(10) FOR MAKING DOWNWARD ADJUSTMENT IN DEDUCTION CLAIMED UNDER SECT ION 10AA OF THE INCOME TAX ACT ? IF YES, THEN, HOW MUCH ADJUSTMENT IS TO BE MADE IN BOTH YEARS. 4. AS OBSERVED EARLIER, THE FACTS ARE IDENTICAL IN BOTH THE YEARS, THEREFORE, FOR THE FACILITY OF REFERENCE, WE TAKE T HE FACTS MAINLY FROM THE ASSTT.YEAR 2009-10. 5. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE IS A PARTNERSHIP FIRM INCORPORATED ON 10-7-2007. IT IS ENGAGED IN THE MA NUFACTURING AND EXPORT OF DIAMOND STUDDED GOLD JEWELLERY. ITS UNIT IS SITUATED IN SPECIAL ECONOMIC ZONE, SURAT. THE COMMERCIAL PRODUCTION OF THE ASSESSEE-FIRM WAS STARTED IN DECEMBER, 2007. THE ASSESSMENT YEAR 2008-09 WAS THE FIRST YEAR OF OPERATION. THE ASSESSEE HAD OFFERED INCOME IN THE ASSTT.YEAR 2008-09 FOR THE PERIOD OF 4 MONTHS, AND DISCLOSED PROFIT AT THE RATE OF 20.80% OF THE TURNOVER. IT IS ALSO PERTINENT TO MENTION HERE THAT THE ASSESSEE HAS 5 PARTNERS, VIZ. KIRANMANI D IAMONDS P. LTD., HOLDING 51% OF THE CAPITAL IN THE ASSESSEE-FIRM. T HIS PARTNER IS A HUNDRED PERCENT SUBSIDIARY OF KIRAN JEWELLERY PVT.L TD., THEREFORE, ACCORDING TO THE AO, M/S.KIRAN JEWELLERY HOLDS 51% STAKES IN THE ASSESSEE-FIRM. REMAINING FOUR PARTNERS ARE (I), BA BUBHAI SHAMJIBHAI LAKHANI (8%), (II) MAVJIBHAI SHAMJIBHAI LAKHANI (8% ), (III) VALLABHABHAI ITA NO.2629/AHD/2014 (KIRAN JEWELLERY)-3 3 SHAMJIBHAI LAKHANI (8%), AND (IV) MUKESH JAYANTILAL SHAH (25%). IT ALSO EMERGES OUT THAT W.E.F 1.10.2008, THE STAKE OF M/S.MUKESH SHAH HAS BEEN REDUCED TO 10% AND STAKE OF 3 LALKHANI BRO THERS HAVE BEEN INCREASED TO 13%. 6. THE ASSESSEE HAS FILED ITS RETURN OF INCOME FOR THE ASSTT.YEAR 2009-10 ON 17.12.2010 DECLARING RETURNED INCOME AT NIL. THE ASSESSEE HAS CLAIMED EXEMPTION OF RS.62,10,78,275/- UNDER SECTION 10AA OF THE I.T.ACT. THE ASSESSEE HAS SHOWN PROFI T AT 23.67% OF THE TURNOVER. THE AO HAS PASSED ASSESSMENT ORDER UNDE R SECTION 143(3) ON 26.3.2013. HE OBSERVED THAT THE ASSESSEE HAS SH OWN MORE THAN ORDINARY PROFIT. THEREFORE, IT REQUIRES DOWNWARD A DJUSTMENT AS CONTEMPLATED IN SECTION 80IA(10) R.W.S. 10AA(9) OF THE ACT. THE LD.AO HAS REDUCED THE COMPUTATION OF PROFIT BY 3% OF THE TURNOVER AND CALCULATED THE ELIGIBLE PROFIT AVAILABLE TO THE ASS ESSEE FOR DEDUCTION. IN OTHER WORDS, THE DEDUCTION IS TO BE COMPUTED AT THE RATE OF 20.67% OF THE TURNOVER INSTEAD OF 23.67% RATE APPLIED BY THE ASSESSEE ON THE TURNOVER. THIS EXERCISE BY THE AO HAS RESULTED A T AXABLE INCOME OF RS.6,97,11,494/-, AND ACCORDINGLY, THE AO HAS RAISE D DEMAND OF RS.3,50,68,507/-. 7. IN ASSTT.YEAR 2010-11, THE ASSESSEE HAS FIELD IT S RETURN OF INCOME ON 27.9.2010 DECLARING INCOME OF RS.4,91,079/-. TH E ASSESSEE CLAIMED EXEMPTION UNDER SECTION 10AA(1) OF THE INCOME TAX A CT TO THE TUNE OF RS.92,08,30,599/-. IN THIS YEAR, THE ASSESSEE HAS SHOWN ITS PROFIT RATIO AT 23.63%. THE LEARNED AO HAS OBSERVED THAT PROFIT SHOWN BY THE ASSESSEE IS MORE THAN THE ORDINARY PROFIT, THEREFOR E, HE MADE DOWNWARD ADJUSTMENT AS CONTEMPLATED IN SECTION 10AA (9) R.W.S. 80IA(10) OF THE ACT. THE LD.AO HAS MADE THE DOWNWA RD ADJUSTMENT OF PROFIT BY 9.8%. THE ELIGIBLE PROFIT FOR EXEMPTION UNDER SECTION 10AA(1) WAS REDUCED FROM 23.63% (OPERATING PROFIT AFTER DEP RECIATION, BUT BEFORE THE INTEREST) TO 11.45%. THUS, DOWNWARD ADJ USTMENT HAS ITA NO.2629/AHD/2014 (KIRAN JEWELLERY)-3 4 RESULTED A DISALLOWANCE OF RS.49,73,99,073/- FROM E LIGIBLE EXEMPTION, WHICH HAS GIVEN RISE TO A DEMAND OF RS.19,36,88,880 /-. 8. DISSATISFIED WITH THE ASSESSMENT ORDERS, THE ASS ESSEE CARRIED THE MATTER IN APPEAL BEFORE THE LD.FIRST APPELLATE AUTH ORITY IN BOTH THE ASSESSMENT YEARS. 9. THE LD.CIT(A) TOOK UP BOTH THE APPEALS TOGETHER FOR HEARING. ON AN ANALYSIS OF RECORD, THE LD.FIRST APPELLATE AUTHO RITY FORMED AN OPINION THAT THOUGH THE ISSUE INVOLVED IN BOTH THE YEARS IS THE SAME I.E. WHETHER THE ASSESSEE HAD EARNED MORE THAN THE ORDIN ARY PROFITS OR NOT. SUCH PROFIT MAY VARY FROM YEAR TO YEAR ON THE BASIS OF GENERAL PARAMETER OF INDUSTRY, UNLESS SOMETHING SPECIFIC HA S TAKEN IN THE ASSESSEES CASE, BUT, THE ESTIMATE BY THE AO IN BOT H THE YEARS DIFFERS CONSIDERABLY. THEREFORE, THE ESTIMATE MAY REQUIRE INCREASE IN ASSTT.YEAR 2009-10 OR DECREASE IN THE ASSTT.YEAR 01 0-11, EVEN IF THE AOS ACTION IS UPHELD IN PRINCIPLE. IN THIS WAY, THE LD.FIRST APPELLATE AUTHORITY HAS ISSUED NOTICE FOR ENHANCEMENT TO THE ASSESSEE IN BOTH THE YEARS. SUCH NOTICE WAS ISSUED WITHOUT PREJUDICE TO THE DECISION, WHICH MAY BE TAKEN REGARDING APPLICABILITY OF SECTION 80I A(10) IN BOTH THE ASSESSMENT YEARS. 10. AFTER HEARING THE ASSESSEE, THE LD.FIRST APPELL ATE AUTHORITY HAS ENHANCED THE ADJUSTMENT TO 6.3% OF THE TURNOVER IN THE ASSTT.YEAR 2009-10 AND REDUCED THE ADJUSTMENT MADE BY THE AO A T 9.18% OF THE TURNOVER TO 5.6% IN ASSTT.YEAR 2010-11. THE FINDING OF THE CIT(A) IN THIS RESPECT ARE IN PARA 16.4, WHICH READS AS UNDER : 16.4 AS RESULT THE ADDITION OF 3% OF TURNOVER MADE IN AY 2009- 10 IS ENHANCED TO 6.3% OF TURNOVER. FOR A.Y.2010-1 1, THE ADDITION OF 9.18% OF TURNOVER MADE BY THE ASSESSING OFFICER IS REDUCED TO 5.06% OF TURNOVER. THE RESULTANT POSITI ON WILL BE AS UNDER: ITA NO.2629/AHD/2014 (KIRAN JEWELLERY)-3 5 A Y 2009-10 A Y 2010-11 TURN OVER 2323716467 4612543860 ADDITION BY A.O. 69711494 423431526 ADDITION AS PER THIS ORDER 14,63,94,137 23,33,94,719 11. IN THIS WAY, THE LD.FIRST APPELLATE AUTHORITY H AS DISMISSED THE APPEAL OF THE ASSESSEE FOR THE ASSTT.YEAR 2009-10 A ND THE ASSESSMENT HAS BEEN ENHANCED, WHEREAS, THE APPEAL OF THE ASSES SEE FOR THE ASSTT.YEAR 2010-11 HAS BEEN PARTLY ALLOWED. THE AS SESSEE IS IMPUGNING THE DOWNWARD ADJUSTMENT MADE IN THE ELIGIBLE PROFIT FOR THE GRANT OF EXEMPTION UNDER SECTION 10AA IN BOTH THE ASSESSMENT YEAS, WHEREAS, THE REVENUE, IN ITS APPEAL, IS IMPUGNING THE PART D ELETION MADE BY THE LD.CI(A) IN THE ASSTT.YEAR 2010-11. 12. BEFORE WE EMBARK UPON AN INQUIRY AS TO WHETHER ANY DOWNWARD ADJUSTMENT IN DEDUCTION CLAIMED BY THE ASSESSEE UND ER SECTION 10AA IS TO BE MADE IN THE GIVEN FACTS AND CIRCUMSTANCES BY RESORTING TO SECTION 80IA(10), WE THINK IT APPROPRIATE TO BEAR IN MIND C ERTAIN BASIC PRINCIPLES OF INTERPRETATION OF STATUTE FOR CONSTRUING THE SCO PE OF SECTION 80IA(10) R.W.S. 10AA(9) OF THE INCOME TAX ACT, 1961. BOTH T HESE SECTIONS HAVE DIRECT BEARING ON THE CONTROVERSY; THEREFORE, IT IS PERTINENT TO TAKE NOTE OF THESE SECTIONS. THEY READ AS UNDER: SECTION 10AA(9) ( 9) THE PROVISIONS OF SUB-SECTION (8) AND SUB-SECTIO N (10) OF SECTION 80-IA SHALL, SO FAR AS MAY BE, APPLY IN RELATION TO THE UNDERTAKING REFERRED TO IN THIS SECTION AS T HEY APPLY FOR THE PURPOSES OF THE UNDERTAKING REFERRED TO IN SECTION 80-IA. SECTION 80IA(10) (10) WHERE IT APPEARS TO THE ASSESSING OFFICER THAT , OWING TO THE CLOSE CONNECTION BETWEEN THE ASSESSEE CARRYI NG ON THE ELIGIBLE BUSINESS TO WHICH THIS SECTION APPLIES AND ANY OTHER PERSON, OR FOR ANY OTHER REASON, THE COURSE O F BUSINESS BETWEEN THEM IS SO ARRANGED THAT THE BUSIN ESS ITA NO.2629/AHD/2014 (KIRAN JEWELLERY)-3 6 TRANSACTED BETWEEN THEM PRODUCES TO THE ASSESSEE MO RE THAN THE ORDINARY PROFITS WHICH MIGHT BE EXPECTED T O ARISE IN SUCH ELIGIBLE BUSINESS, THE ASSESSING OFFICER SH ALL, IN COMPUTING THE PROFITS AND GAINS OF SUCH ELIGIBLE BU SINESS FOR THE PURPOSES OF THE DEDUCTION UNDER THIS SECTIO N, TAKE THE AMOUNT OF PROFITS AS MAY BE REASONABLY DEEMED T O HAVE BEEN DERIVED THEREFROM: 13. THE LEARNED COUNSEL FOR THE ASSESSEE, WHILE APP RAISING US WITH THE SCOPE AND AMBIT OF SECTION 10AA(9) R.W.S. 80IA(10) CONTENDED THAT THIS ASPECT HAS FALLEN FOR CONSIDERATION BEFORE THE HON BLE HIGH COURTS AS WELL AS BEFORE THE TRIBUNAL. HE WOULD SUBMIT THAT SECTION 80IA(10) IS A FICTIONAL PROVISION, DEEMING REASONABLE PROFIT AS A CTUAL PROFIT FOR THE PURPOSE OF COMPUTING THE AMOUNT OF ELIGIBLE DEDUCTI ON UNDER SECTION 10AA ON FULFILLMENT OF OTHER CONDITIONS. HE POINTE D OUT THAT IN ORDER TO ATTRACT SECTION 80IA(10) FIRST CONDITION FLOWING FR OM PLAIN READING OF THIS SECTION IS THAT THERE SHOULD BE CLOSE CONNECTION BE TWEEN THE ASSESSEE CARRYING ON ELIGIBLE BUSINESS AND ANY OTHER SUCH PE RSON. HE FURTHER CONTENDED THAT NEXT CONDITION WOULD BE THAT COURSE OF BUSINESS SHOULD BE SO ARRANGED BETWEEN THE ASSESSEE AND SUCH OTHER CLOSELY CONNECTED PERSON THAT BUSINESS TRANSACTION BETWEEN THEM PRODU CES MORE THAN THE ORDINARY PROFITS TO THE ASSESSEE CARRYING ON ELIGIB LE BUSINESS. ACCORDING TO THE LD. COUNSEL, ON FULFILLMENT OF THESE TWO CON DITIONS CUMULATIVELY, THEN THE AO WOULD PROCEED TO DETERMINE THE AMOUNT O F PROFITS AS MAY BE REASONABLE DEEMED TO HAVE BEEN DERIVED FROM THE TRANSACTIONS OF SUCH ARRANGED COURSE OF BUSINESS, AND THEN THE AO W OULD COMPUTE ELIGIBLE PROFITS FOR DEDUCTION ADMISSIBLE UNDER SEC TION 10AA OF THE ACT. ON THE STRENGTH OF HONBLE KARNATAKA HIGH COURT DEC ISION IN THE CASE OF CIT VS. H.P. GLOBAL SOFT LTD., (2012) 342 ITR 263, THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT ONUS IS UPON THE AO TO DEMONSTRATE THAT BUSINESS AFFAIRS OF THE ASSESSEE WITH THE CLOS ELY CONNECTED ENTITY HAS BEEN SO ARRANGED WHICH GIVE RISE TO MORE THAN T HE ORDINARY PROFIT TO THE ASSESSEE. IN OTHER WORDS, IT IS FOR THE AO TO BRING DEMONSTRATIVE EVIDENCE ON RECORD EXHIBITING THE ARRANGEMENT OF BU SINESS RESULTING IN ITA NO.2629/AHD/2014 (KIRAN JEWELLERY)-3 7 MORE THAN THE ORDINARY PROFIT. THE LEARNED COUNSEL FOR THE ASSESSEE FURTHER CONTENDED THAT THE EXPRESSION COURSE OF BU SINESS BETWEEN THEM SO ARRANGED EMPLOYED IN SECTION 80IA(010) HAS BEEN INTERPRETED AND CONSTRUED BY THE ITAT IN THE CASE OF A.T. KEARN EY INDIA P. LTD. ACIT, 66 SOT 140 (ITAT, DELHI), HONEYWELL AUTOMATIO N INDIA LTD. VS. DCIT, (2015) 55 TAXMANN.COM 539 (PUNE TRIBUNAL). H E POINTED OUT THAT THE ABOVE EXPRESSION DOES INDICATE IN ITSELF T HAT THE PROFIT AND GAINS OF ELIGIBLE BUSINESS CANNOT BE TINKERED WITH BY THE AO MERELY BECAUSE THERE ARE MORE THAN ORDINARY PROFITS OR THA T THEY ARE QUITE HIGH. EXISTENCE OF SUBSTANTIAL OR MORE THAN THE OR DINARY PROFIT, BY ITSELF DOES NOT SUFFICIENTLY EMPOWER THE AO TO DISREGARD T HEM AND DETERMINE THE PROFITS, WHICH MAY BE CONSIDERED TO BE REASONAB LY DEEMED TO HAVE BEEN DERIVED THEREFROM. HE POINTED OUT THIS ASPECT HAS BEEN CONSIDERED IN THESE TWO DECISIONS OF THE ITAT IN DE TAIL. HE TOOK US THROUGH BOTH THESE DECISIONS AND SUBMITTED THAT THE ITAT PUNE BENCH IN THE CASE OF HONEYWELL AUTOMATION INDIA LTD. (SUP RA) CONSIDERED THE JUDGMENT OF HONBLE KARNATAKA HIGH COURT IN THE CAS E OF H.P. GLOBAL SOFT LTD (SUPRA), AS ALSO THE DECISION OF THE BOMBA Y HIGH COURT IN THE CASE OF BANK OF INDIA LTD. VS. AHMEDABAD MFG. & CAL ICO PRINTING CO. LTD., (1972) 42 COMP CAS 211 (BOM). THE TRIBUNAL H AS ALSO CONSIDERED CBDT CIRCULAR NO.308 DATED 29.6.2008, WHICH HAS EXP LAINED THE REASON FOR INTRODUCTION OF SUB-SECTION 7 TO SECTION 10A R. W.S. 80IA(10). THE LD. COUNSEL FOR THE ASSESSEE FURTHER RELIED UPON TH E DECISION OF THE ITAT, CHENNAI BENCH IN THE CASE OF VISUAL GRAPHICS COMPUTING SERVICES VS. ACIT, (2012) 15 ITR(T) 393 (CHENNAI), AS ALSO T HE ORDER OF THE ITAT, HYDERABAD BENCH IN THE CASE OF ZAVATA INDIA P . LTD., VS. ITO, (2013) 141 ITD 456. HE ALSO RELIED UPON THE ORDER OF THE ITAT, BANGALORE BENCH IN THE CASE OF DIGITAL EQUIPMENT IN DIA LTD. VS. DCIT, 103 TTJ (BANG) 329 AND ALSO THE DECISION OF ITAT, H YDERABAD BENCH IN THE CASE OF WESTON KNOWLEDGE SYSTEMS & SOLUTIONS (I NDIA) P. LTD. VS. ITO, (2012) 52 SOT 120. FURTHER RELIANCE WAS PLACE D ON THE DECISION OF ITA NO.2629/AHD/2014 (KIRAN JEWELLERY)-3 8 HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. SC HMETZ INDIA P. LTD., (2012) 26 TC 336. THE LD. COUNSEL FOR THE AS SESSEE HAS PLACED ON RECORD COPIES OF THESE DECISIONS. 14. ON THE STRENGTH OF THIS DECISION OF THE HONBLE BOMBAY HIGH COURT, HE POINTED OUT THAT THE HONBLE HIGH COURT H AS OBSERVED THAT THE EXTRA-ORDINARY PROFIT CANNOT LEAD TO THE CONCLUSION THAT THIS IS THE ARRANGEMENT BETWEEN THE PARTIES. IN OTHER WORDS, F IRST ARRANGEMENT HAS TO BE DEMONSTRATED BY THE AO, AND THEREAFTER, I T IS BE CONSTRUED WHETHER THAT ARRANGEMENT HAS RESULTED IN EXTRA-ORDI NARY PROFIT TO THE ASSESSEE. 15. THE LEARNED DR, ON THE OTHER HAND, RELIED UPON THE ORDERS OF THE REVENUE AUTHORITIES BELOW. SHE CONTENDED THAT THE CIT(A) HAS MADE ANALYSIS OF THE FINANCIAL DATA OF M/S.KIRAN GEM PVT . LTD., (KGPL FOR SHORT), WHICH IS A CLOSELY CONNECTED WITH ASSESSEE AND FALLS WITH IN THE AMBIT OF SUCH PERSONS, AND FROM WHOM SUBSTANTIAL PURCHASES OF RAW- MATERIAL HAS BEEN MADE BY THE ASSESSEE. SIMILARLY , THE CIT(A) HAS MADE ANALYSIS OF THE FINANCIAL DATA OF THE ENTITIES TO WHOM SALES HAVE BEEN MADE BY THE ASSESSEE. WHEN THESE DATAS ARE CO MPARED, THEN THEY DO INDICATE THAT THERE MUST BE SOME ARRANGEMEN T BETWEEN THE ASSESSEE AND CLOSELY CONNECTED ENTITY WHICH HAS RES ULTED MORE THAN THE ORDINARY PROFIT TO THE ASSESSEE, AND THEREFORE, THE AO HAS RIGHTLY TOOK ACTION UNDER SECTION 80IA(10) OF THE INCOME TAX ACT . 16. WE HAVE CONSIDERED RIVAL CONTENTIONS AND GONE T HROUGH THE RECORD CAREFULLY. THE DEDUCTION IS ADMISSIBLE TO T HE ASSESSEE UNDER SECTION 10AA. AS FAR AS THE FULFILLMENT OF CONDITI ONS FOR CLAIMING SUCH DEDUCTION ENUMERATED IN SECTION 10AA IS CONCERNED, THESE ARE NOT DISPUTED BY THE PARTIES BEFORE US. IT IS ALSO CL EAR FROM THE FACT THAT THE AO HAS HIMSELF GRANTED DEDUCTION TO THE ASSESSE E. DISPUTE RELATES TO COMPUTATION OF ELIGIBLE PROFIT FOR GRANT OF SUCH DEDUCTION. SUB- ITA NO.2629/AHD/2014 (KIRAN JEWELLERY)-3 9 SECTION 9 OF SECTION 10AA EXTRACTED (SUPRA) PROVIDE S THAT SUB-SECTION 10 OF SECTION 80IA SHALL, SO FAR AS MAY BE, APPLY I N RELATION TO THE UNDERTAKING REFERRED TO IN THIS SECTION AS THEY APP LY FOR THE PURPOSES OF THE UNDERTAKING REFERRED TO IN SECTION 80-IA. IT C ONTEMPLATES THAT SUB- SECTION (10) OF SECTION 80IA WILL BE APPLICABLE ON THE UNDERTAKING REFERRED TO SECTION 10AA. IN SIMILAR FASHION, AS I T IS APPLICABLE FOR THE PURPOSE OF UNDERTAKING REFERRED TO IN SECTION 80IA. IT IS PERTINENT TO MENTION HERE THAT SUB-SECTION 10A OF SECTION 80IA O F THE ACT, HAS BEEN BOUGHT IN THE ACT TO PLUG ABUSE OF TAX CONCESSION B Y MANIPULATION OF PROFITS BETWEEN ASSOCIATE CONCERN OR BETWEEN DIFFER ENT UNITS OF THE SAME CONCERN. THE ITAT, PUNE IN THE CASE OF HONEYW ELL (SUPRA) HAS MADE REFERENCE OF CIRCULAR ISSUED BY CBDT BEARING N O.308 DATED 29.6.2008, EXPLAINING THE REASON FOR INTRODUCTION O F SUB-SECTION 10A(7) R.W.S. 80IA(10) (FOR SIMILAR OBJECT). WE DEEM IT A PPROPRIATE TO TAKE NOTE OF THIS CIRCULAR. IT READS AS UNDER: ' THE PROVISIONS OF SUB-SECTION (8) AND SUB-SECTION ( 9) OF SECTION 80-I WILL ALSO APPLY IN RELATION TO THE INDUSTRIAL UNDERTAKING REFERRED TO IN THE NEW SECTION 10A AS THEY APPLY IN RELATION TO AN INDUSTRIAL UNDERTAKING REFERRED TO UNDER SECTION 80 -I. UNDER THE APPLIED SUB-SECTION (8) OF SECTION 80-I, IT IS PROV IDED THAT WHERE AN ASSESSEE HAS SEVERAL UNITS, SOME IN THE FREE TRA DE ZONE AND SOME OUTSIDE, THE PROFITS OF THE UNIT IN THE FREE T RADE ZONE WILL BE COMPUTED AFTER TAKING THE COST OF THE GOODS TRANSFE RRED TO OR FROM THE UNIT ON THE BASIS OF THE MARKET VALUE OF SUCH G OODS. THE APPLIED SUB-SECTION (9) OF SECTION 80-I EMPOWERS TH E INCOME-TAX OFFICER TO DETERMINE THE REASONABLE PROFITS THAT CO ULD BE ATTRIBUTED TO THE QUALIFYING UNDERTAKING IN THE FRE E TRADE ZONE IN CASES WHERE, OWING TO THE CLOSE CONNECTION BETWEEN THE ASSESSEE AND ANY OTHER PERSONS OR FOR ANY OTHER REASON, THE COURSE OF THE BUSINESS IS SO ARRANGED THAT THE INDUSTRIAL UNDERTA KING SET UP IN THE FREE TRADE ZONE DERIVES MORE THAN ORDINARY PROF ITS WHICH MAY BE EXPECTED TO ARISE IN THAT BUSINESS. THIS PROVISI ON HAS BEEN MADE WITH A VIEW TO AVOIDING ABUSE OF THE NEW TAX C ONCESSIONS BY MANIPULATION OF PROFITS BETWEEN ASSOCIATE CONCERNS OR DIFFERENT UNITS OF THE SAME CONCERN.' [UNDERLINED FOR EMPHASI S BY US] ITA NO.2629/AHD/2014 (KIRAN JEWELLERY)-3 10 17. A PLAIN READING OF SUB-SECTION (10) OF SECTION 80IA MAKES IT CLEAR THAT THE AO OF THE ASSESSEE, HAVING ELIGIBLE BUSINE SS, IS EMPOWER TO SCALE DOWN THE PROFITS, WHERE IT APPEARS TO HIM THA T OWING TO CLOSE CONNECTION BETWEEN THE ASSESSEE, CARRYING ON ELIGIB LE BUSINESS AND ANY OTHER PERSON, THE COURSE OF THE BUSINESS IS SO ARRA NGED THAT THE BUSINESS TRANSACTED BETWEEN THEM PROVIDES TO THE AS SESSEE MORE THAN THE ORDINARY PROFITS, WHICH MIGHT BE EXPECTED TO AR ISE IN SUCH ELIGIBLE BUSINESS. PLAIN READING OF SECTION INDICATES THAT IT HAS MAINLY THREE COMPARTMENTS. THE FIRST COMPARTMENT PROVIDES THAT THERE SHOULD BE A CLOSE CONNECTION BETWEEN THE ASSESSEE CARRYING ON T HE ELIGIBLE BUSINESS AND ANY OTHER SUCH PERSONS. LET US FIRST EXAMINE T HIS ASPECT. THE LD. FIRST APPELLATE AUTHORITY HAS POINTED OUT THAT THE ASSESSEE HAS FIVE PARTNERS. 51% OF THE STAKE IS BEING HELD BY M/S.KI RANMANI DIAMONDS P. LTD., WHICH IS A HUNDRED PERCENT SUBSIDIARY OF M/S. KIRAN GEMS PVT. LTD. THE ASSESSEE HAS PURCHASED 167.50 CRORES OF DIAMOND S FROM KIRAN GEMS. THIS CONSTITUTES 98.5% OF THE TOTAL PURCHASE S OF RS.170.65 CRORES. THUS, KGPL CAN BE TERMED AS A CLOSELY CONN ECTED ENTITY IN TERMS OF SECTION 80IA(10). 18. NEXT QUESTION IS THAT THE COURSE OF BUSINESS OF THE ASSESSEE AND OTHER CLOSELY CONNECTED BUSINESS SHOULD BE SO ARRAN GED THAT THE BUSINESS TRANSACTED BETWEEN THEM PRODUCES MORE THAN THE ORDINARY PROFITS TO THE ASSESSEE CARRYING ON ELIGIBLE BUSINE SS. THE ITAT, PUNE BENCH IN THE CASE OF HONEYWELL AUTOMATION INDIA LTD . (SUPRA) AS WELL AS IN THE CASE OF A.T. KEARNEY INDIA P. LTD. (SUPRA) I S UNANIMOUS IN EXPLAINING THE MEANING OF EXPRESSION THE COURSE OF BUSINESS IS SO ARRANGED THAT THE BUSINESS TRANSACTED PRODUCES TO T HE ASSESSEE MORE THAN ORDINARY PROFITS. AS OBSERVED EARLIER SECTIO N 80IA(10) IS INTENDED TO PLUG THE ABUSE OF TAX CONCESSION, THEREFORE, BEF ORE CONSIDERING THE MEANING OF EXPRESSION THE COURSE OF BUSINESS IS SO ARRANGED THAT THE BUSINESS TRANSACTED PRODUCES TO THE ASSESSEE MORE T HAN ORDINARY ITA NO.2629/AHD/2014 (KIRAN JEWELLERY)-3 11 PROFITS., LEGISLATIVE INTENTION OF PLUGGING ABUSE OF TAX CONCESSION GRANTED UNDER SECTION 10A IS TO BE PREFACED BEFORE THIS EXPRESSION. IN OTHER WORDS, THERE SHOULD BE ABUSE OF TAX CONCESSIO N BY MANIPULATION OF PROFIT. SUCH MANIPULATION OF PROFITS SHOULD BE THE RESULT OF ARRANGEMENT OF THE BUSINESS AFFAIRS, IN SUCH A MANNER, WHICH GI VES RISE TO MORE THAN THE ORDINARY PROFITS. IN BOTH THESE ORDERS, THE IT AT HAS HELD THAT THE REVENUE HAS TO BRING DEMONSTRATIVE EVIDENCES EXHIBI TING THE ARRANGEMENT OF BUSINESS AFFAIRS IN SUCH A MANNER, W HICH HAS RESULTED THE ASSESSEE MORE THAN THE ORDINARY PROFITS. IN OT HER WORDS, SUCH MANIPULATION OF PROFITS SHOULD BE THE RESULT OF ARR ANGEMENT OF BUSINESS AFFAIRS. IT IS NOT OTHER WAY ROUND THAT DECLARATIO N OF SUBSTANTIAL PROFITS WOULD BE CONSTRUED THAT BUSINESS AFFAIRS HAVE ARRAN GED IN SUCH A MANNER THAT THE ASSESSEE HAS EARNED MORE THAN THE O RDINARY PROFITS. THE LANGUAGE OF SECTION 80IA OF THE INCOME TAX ACT SUGGESTS THAT THE PROFITS AND GAINS OF ELIGIBLE BUSINESS CANNOT TINKE RED WITH BY THE AO, MERELY BECAUSE, THERE ARE MORE THAN THE ORDINARY PR OFITS OR THEY ARE QUITE HIGH. THIS EXISTENCE OF SUBSTANTIAL OR MORE THAN THE ORDINARY PROFITS BY ITSELF DOES NOT EMPOWER THE AO TO DISREG ARD THEM AND DETERMINE THE PROFITS WHICH HE MAY CONSIDER TO BE R EASONABLY DEEM TO HAVE BEEN DERIVED THERE FROM. THE LD.AO HAS TO FIR ST DEMONSTRATE THE ARRANGEMENT OF BUSINESS AFFAIRS WHICH RESULTED MORE THAN ORDINARY PROFITS. 19. THE ITAT, DELHI BENCH HAS EXPLAINED THE SITUATI ON BY WAY OF AN EXAMPLE. IT IS PERTINENT TO TAKE NOTE OF THIS OBSE RVATION OF THE ITAT, DELHI IN THIS REGARD, WHICH READS AS UNDER: TO CITE AN EXAMPLE, IF ONE PERSON SUCCEEDS IN C UTTING DOWN ITS COSTS WITHOUT AFFECTING THE QUALITY OF OUTPUT, HE WILL NATURALLY EARN MORE PROFIT THAN OTHERS IN THE SAME LINE OF BU SINESS. SIMILARLY, ECONOMIES OF SCALE ALSO AFFECT THE PROFI T. IN THE LIKE MANNER, THE EXTENT OF ADMINISTRATIVE, MARKETING AND SELLING EXPENSES ALSO HAS A BEARING ON THE OVERALL PROFIT O F A BUSINESS. OTHER FACTORS FOR THE INCREASE IN THE PROFITS MAY B E ECONOMICAL ITA NO.2629/AHD/2014 (KIRAN JEWELLERY)-3 12 PURCHASES OR COSTLY SALES. IF A BUSINESSMAN MANAGES TO MAKE ECONOMICAL PURCHASES FROM THE MARKET, HE WILL NATUR ALLY EARN MORE PROFIT. ON THE OTHER HAND, IF THE PURCHASES AR E NOT ACTUALLY ECONOMICAL, BUT BECAUSE OF THE CLOSE CONNECTION WIT H THE SELLER, THE ARRANGEMENT IS SUCH SO AS TO SHOW LOW PURCHASE PRICE IN THE ACCOUNTS OF THE PERSON CARRYING ON ELIGIBLE BUSINES S, THE APPARENT PROFIT WILL STILL BE HIGH. THOUGH IN BOTH SUCH CASE S, THE PROFIT OF THE ELIGIBLE BUSINESS HAS SHOT UP, BUT IN THE FIRST INS TANCE, IT IS HIGHER DUE TO EFFICIENCIES AND IN THE SECOND, IT IS HIGHER DUE TO 'ARRANGEMENT'. SIMILARLY, IF A BUSINESSMAN MANAGES TO MAKE SALES IN THE MARKET AT A HIGHER PRICE BECAUSE OF ITS EFFE CTIVE SELLING TECHNIQUES, HE WILL EARN MORE PROFIT. ON THE OTHER HAND, IF THE SALES ARE NOT AT HIGH PRICE BECAUSE OF THE EFFECTIV E MARKETING STRATEGY, BUT BECAUSE OF THE CLOSE CONNECTION WITH THE BUYER, THE ARRANGEMENT IS SUCH SO AS TO SHOW HIGHER SALE PRICE IN THE ACCOUNTS OF THE PERSON CARRYING ON ELIGIBLE BUSINES S, THE PROFIT WILL STILL BE HIGH. THOUGH IN BOTH THE CASES THE PROFIT OF THE ELIGIBLE BUSINESS WILL BE HIGHER, BUT IN THE FIRST INSTANCE IT WILL BE HIGHER DUE TO BETTER MARKETING STRATEGY AND IN THE SECOND, IT WILL BE HIGHER DUE TO 'ARRANGEMENT'. WHAT IS RELEVANT FOR I NVOKING SUB- SECTION (10) IS THE PREVALENCE OF THE SECOND SITUAT ION ABOVE WHERE THE HIGHER PROFIT HAS RESULTED DUE TO 'ARRANGEMENT' BETWEEN THE ASSESSEE AND ITS CLOSELY CONNECTED PERSON AND NOT T HE FIRST, WHERE THE HIGHER PROFIT RESULTED DUE TO THE ASSESSEE'S EF FECTIVELY MANAGING THE BUSINESS. THUS IT IS EVIDENT THAT THOU GH IN BOTH THE SITUATIONS, THE PROFIT IS HIGHER, BUT RECOURSE TO S UB-SECTION (10) CAN BE TAKEN ONLY IN THE CASE OF 'ARRANGEMENT' BETW EEN THE ASSESSEE AND THE CLOSELY CONNECTED PERSON. IN OTHER WORDS, THE MERE HIGHER PROFIT OF THE PERSON CARRYING ON THE EL IGIBLE BUSINESS IS NO CRITERIA TO PRESS INTO SERVICE THIS PROVISION , UNLESS THE 'ARRANGEMENT' IS PROVED IN THE FIRST INSTANCE. THE 'ARRANGEMENT' NEEDS TO BE SPECIFICALLY PROVED BY THE AO BY SHOWIN G THAT THE ASSESSEE INTENTIONALLY MADE PURCHASES AT A RELATIVE LY LOWER RATE FROM THE CLOSELY CONNECTED PERSON VIS--VIS THAT AV AILABLE IN THE MARKET FOR THE SAME PRODUCTS OR THE ASSESSEE MADE S ALES TO THE CLOSELY CONNECTED PERSON AT A RELATIVELY HIGHER RAT E VIS--VIS THE PREVAILING MARKET PRICE OF THE SIMILAR PRODUCTS ETC . OR THAT THE ASSESSEE HAVING ELIGIBLE INCOME BOOKED RELATIVELY L ESS EXPENSES OR SHOWED RELATIVELY MORE INCOME ON OTHER COUNTS IN TR ANSACTIONS WITH CLOSELY CONNECTED PERSON. IT IS ONLY WHEN THE EXISTENCE OF' 'ARRANGEMENT' IS PROVED IN THIS MANNER THAT THE PRO VISIONS OF SUB- SECTION (10) CAN BE EMPLOYED TO REDUCE THE EXTRAORD INARY PROFITS RESULTING FROM SUCH LOWER PAYMENTS OR EXCESS RECOVE RIES TO/FROM THE RELATED PERSON. TO PUT IT SIMPLY, THE HIGHER PR OFIT SHOWN BY THE ELIGIBLE ASSESSEE IS THE END POINT OF THE EXERC ISE TO BE UNDERTAKEN BY THE AO IN THIS REGARD, STARTING WITH EXPRESSLY ITA NO.2629/AHD/2014 (KIRAN JEWELLERY)-3 13 SHOWING AS TO HOW THE TRANSACTIONS WERE SPECIFICALL Y ARRANGED TO PRODUCE MORE THAN ORDINARY PROFITS TO THE ASSESSEE CARRYING ON THE ELIGIBLE BUSINESS. THE MERE HIGHER PROFIT EARNE D BY SUCH ELIGIBLE ASSESSEE CAN BE NO REASON TO CONCLUDE THAT THE ASSESSEE TRANSACTED IN SUCH AN 'ARRANGED' MANNER WITH ITS RE LATED PERSONS SO AS TO PRODUCE MORE PROFITS TO IT. AT THE COST OF REPETITION, WE REITERATE THAT THE HIGHER PROFIT SHOULD BE THE 'EFF ECT' OF SUCH AN 'ARRANGEMENT' AND CANNOT BE A SUBSTITUTE OF SUCH 'A RRANGEMENT' ITSELF, WHICH IS A 'CAUSE', FOR INVOKING SUB-SECTIO N (10) OF SECTION 80-IA. 20. THE ITAT, PUNE HAS ALSO MADE LUCID ENUNCIATION OF THE LAW WHILE CONSTRUING THE MEANING OF SECTION 80IA(10). THE DI SCUSSION MADE BY THE ITAT, PUNE IS WORTH TO NOTE IN THIS REGARD. IT READS AS UNDER: 23. QUITE CLEARLY, THE PROVISIONS OF SECTION 10A(7 ) OF THE ACT INTEND TO PLUG ABUSE OF TAX CONCESSION BY MANIPULAT ION OF PROFITS BETWEEN ASSOCIATED CONCERNS OR BETWEEN DIFFERENT UN ITS OF THE SAME CONCERN. THE OBJECTIVE OF THE AFORESAID PROVIS ION IS THAT THE TAX CONCESSIONS ARE NOT ABUSED BY MANIPULATION OF P ROFITS. IN OUR CONSIDERED OPINION, THE AFORESAID EXPLANATION IN TH E CBDT CIRCULAR (SUPRA) SIGNIFIES THE LEGISLATIVE INTENT A ND IT IS ALSO MANIFESTED IN THE LANGUAGE OF SECTION 10A(7) R.W.S. 80-IA(10) OF THE ACT. WE SAY SO FOR THE REASON THAT THE PHRASEOL OGY OF SECTION 80-IA(10) OF THE ACT ITSELF SUGGESTS THAT THE PROFI TS AND GAINS OF AN ELIGIBLE BUSINESS CANNOT BE TINKERED WITH BY THE ASSESSING OFFICER MERELY BECAUSE THEY ARE MORE THAN THE ORDIN ARY PROFITS OR THAT THEY ARE QUITE HIGH. THE EXISTENCE OF SUBSTANT IAL OR MORE THAN ORDINARY PROFITS BY ITSELF DOES NOT SUFFICIENT LY EMPOWER THE ASSESSING OFFICER TO DISREGARD THEM AND DETERMINE T HE PROFITS WHICH HE MAY CONSIDER TO BE REASONABLY DEEMED TO HA VE BEEN DERIVED THEREFROM. THE PRESENCE OF THE EXPRESSION ' THE COURSE OF BUSINESS IS SO ARRANGED . THAT THE BUSINES S TRANSACTED PRODUCES TO THE ASSESSEE MORE THAN ORDINARY PROFITS' IS SIGNIFICANT AND ITS UNDERSTANDING HAS T O BE PREFACED BY THE LEGISLATIVE OBJECTIVE OF PLUGGING ABUSE OF THE TAX CONCESSIONS GRANTED U/S 10A OF THE ACT BY MANIPULATION OF PROFI TS BETWEEN ASSOCIATED PARTIES. IN OTHER WORDS, THE IMPORT OF T HE EXPRESSION 'SO ARRANGED' HAS TO BE READ IN CONJUNCTION WITH TH E LEGISLATIVE INTENT THAT THERE SHOULD NOT BE ANY ABUSE OF TAX CO NCESSION BY MANIPULATION OF PROFITS. THEREFORE, SECTION 10A(7) R.W.S. 80- IA(10) OF THE ACT CAN BE INVOKED ONLY WHERE IT IS S HOWN THAT THE COURSE OF BUSINESS IS SO ARRANGED WHICH REFLECTS AN ABUSE OF TAX CONCESSION WHEREBY THE BUSINESS TRANSACTED BETWEEN TWO ENTITIES IS SO ARRANGED, WHICH PRODUCES TO THE ASSESSEE MORE THAN THE ITA NO.2629/AHD/2014 (KIRAN JEWELLERY)-3 14 ORDINARY PROFITS WHICH MIGHT BE EXPECTED TO ARISE I N SUCH ELIGIBLE BUSINESS. THE EMPHASIS IS TO ESCHEW THOSE 'MORE THA N THE ORDINARY PROFITS' WHICH ARE AS A RESULT OF A BUSINE SS BETWEEN TWO CLOSELY CONNECTED CONCERNS HAVING BEEN ARRANGED WIT H THE INTENT OF ABUSE OF THE TAX CONCESSION. OSTENSIBLY, IN THE PRESENT CASE, THE REVENUE WOULD HAVE TO JUSTIFY THAT THE COURSE O F BUSINESS BETWEEN ASSESSEE AND THE ASSOCIATED ENTERPRISES HAS BEEN 'SO ARRANGED' WHICH PRODUCES TO THE ASSESSEE MORE THAN THE ORDINARY PROFITS WHICH MIGHT BE EXPECTED TO ARISE IN SUCH EL IGIBLE BUSINESS WITH THE INTENTION OF ABUSING THE TAX CONCESSION GR ANTED IN SECTION 10A OF THE ACT. THE MERE EXISTENCE OF (I) A CLOSE C ONNECTION BETWEEN THE ASSESSEE AND THE OTHER PERSON; AND, (II ) MORE THAN ORDINARY PROFITS IS NOT SUFFICIENT TO JUSTIFY INVOK ING OF SECTION 80- IA(10) OF THE ACT IN THE ABSENCE OF THERE BEING ANY MATERIAL TO SAY THAT THE COURSE OF BUSINESS BETWEEN THEM IS 'SO ARRANGED' TO ABUSE THE TAX CONCESSIONS GRANTED U/S 10A OF THE AC T BY MANIPULATING PROFITS BETWEEN ASSOCIATED PERSONS. OS TENSIBLY, THE SAME IS REQUIRED TO BE DEMONSTRATED ON THE BASIS OF A COGENT MATERIAL AND EVIDENCE. IN OTHER WORDS, THE PRESENCE OF THE EXPRESSION 'SO ARRANGED' HAS TO BE UNDERSTOOD IN TH E CONTEXT OF THE ABUSE OF TAX CONCESSION WHICH IS SOUGHT TO BE P LUGGED BY THE PROVISIONS OF SECTION 10A(7) R.W.S. 80-IA(10) OF TH E ACT. 21. IT IS PERTINENT TO TAKE NOTE OF THE FACTS OF TH ESE TWO CASES. IN THE CASE OF A.T. KEARNEY INDIA P. LTD. (SUPRA), THE ASS ESSEE WAS ENTITLED TO DEDUCTION UNDER SECTION 10A OF THE INCOME TAX ACT. IT FILED ITS RETURN AND CLAIMED DEDUCTION OF RS.8,22,78,165/-. THE PRO FIT RATIO DECLARED BY THE ASSESSEE WAS 101.19%. THE AO HAS SCALED DOWN T HIS DEDUCTION BY AN AMOUNT OF RS.5.58 CRORES. THE AO HAS GRANTED TH E DEDUCTION AT RS.2.63 CRORES BY APPLYING 20% AS THE REASONABLE PR OFIT RATE. THE TRIBUNAL HAS ALLOWED THE APPEAL OF THE ASSESSEE AND HELD THAT THE AO FAILED TO BRING DEMONSTRATIVE EVIDENCE EXHIBITING T HE FACT THAT THE EXTRA- ORDINARY PROFIT RESULTED TO THE ASSESSEE BY VIRTUE OF ARRANGEMENT OF THE BUSINESS AFFAIRS. 22. IN THE CASE OF HONEYWELL AUTOMATION INDIA LTD. (SUPRA), THE ASSESSEE WAS ENTITLED TO DEDUCTION UNDER SECTION 10 A. IT WAS ENGAGED IN THE EXPORT OF IT ENABLED ENGINEERING/SOFTWARE SE RVICES TO ITS ASSOCIATED ENTERPRISE (AE FOR SHORT) ABROAD. THE ASSESSEE HAS CLAIMED DEDUCTION OF RS.36,36,09,382/- WITH REGARD TO THREE UNITS WHICH ITA NO.2629/AHD/2014 (KIRAN JEWELLERY)-3 15 WERE SITUATED AT STPI UNIT. THE PROFIT MARGIN SHOW N BY THE ASSESSEE WAS AT 80.06% . THE LEARNED AO TOOK THE OPERATIVE PROFIT MARGIN OF THE COMPARABLES AT 17.06% AND CALCULATED THE DEDUCTION ADMISSIBLE TO THE ASSESSEE ACCORDINGLY. THE TRIBUNAL ALLOWED THE APP EAL OF THE ASSESSEE BY HOLDING THAT THE DEPARTMENT FAILED TO BRING ANY DEMONSTRATIVE EVIDENCE ON THE RECORD EXHIBITING THE COURSE OF THE BUSINESS WAS SO ARRANGED BY THE ASSESSEE WITH ITS AE, WHICH HAS RES ULTED EXTRA-ORDINARY PROFITS TO THE ASSESSEE. 23. THE DECISION OF THE HONBLE BOMBAY HIGH COURT I N THE CASE OF CIT VS. SCHMETZ INDIA P. LTD. (SUPRA) WAS ALSO BROUGHT TO OUR NOTICE. THE ASSESSEE HAD TWO UNITS. ONE WAS SITUATED IN HUNDRED PERCENT EXPORT ORIENTED. THE ASSESSEE WAS ENGAGED IN MANUFACTURIN G AND EXPORT OF NEEDLES. SECOND UNIT WAS A TRADING UNIT ENGAGED IN TRADING IN INDUSTRIAL SEWING MACHINE NEEDLES EXPORTED FROM ITS PRINCIPAL COMPANY IN GERMANY. THE ENTIRE EXPORT OF THE ASSESSEE IS TO I TS HOLDING COMPANY IN GERMANY. THE EOU EARNED A PROFIT OF RS.20.54 AN D TRADING UNIT INCURRED A LOSS OF RS.70.29 LAKHS. THE ENTIRE PROF IT OF EOU WAS CLAIMED AS DEDUCTION UNDER SECTION 10A. THE AO HAS INVOKED SECTION 80IA(10) AND RESTRICTED THE DEDUCTION TO RS.13.17 CRORES AND REST OF THE AMOUNT I.E. RS.6.83 CRORES WAS BROUGHT TO TAX. THE TRIBUN AL HAS ALLOWED THE DEDUCTION TO THE ASSESSEE BY HOLDING THAT MERE DECL ARATION OF HIGHER PROFIT WOULD NOT BE SUFFICIENT TO INVOKE SECTION 80 IA(10). THE DEPARTMENT HAS TO BRING ON RECORD DEMONSTRATIVE EVI DENCE EXHIBITING THAT COURSE OF BUSINESS WAS SO ARRANGED WHICH GIVE RISE TO EXTRA- ORDINARY PROFITS. THE HONBLE BOMBAY HIGH COURT HA S UPHELD THE CONCLUSION OF THE TRIBUNAL AND QUESTION FRAMED BY T HE HONBLE HIGH COURT ALONG WITH OBSERVATIONS MADE IN PARA-8 OF THE JUDGMENT IS WORTH TO NOTE AS UNDER: 'WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF T HE CASE AND IN LAW THE TRIBUNAL WAS JUSTIFIED ITA NO.2629/AHD/2014 (KIRAN JEWELLERY)-3 16 (A) IN COMING TO THE CONCLUSION THAT THERE WAS NOTH ING ON RECORD TO SHOW THAT THE PROFITS ARRIVED AT BY THE ASSESSEE IN RESPECT OF THE 10A UNIT CARRYING ON THE BUSINESS OF MANUFAC TURING INDUSTRIAL SEWING MACHINE NEEDLESS WAS NOT IN THE N ORMAL COURSE OF ITS BUSINESS AND THAT THE ABNORMALLY HIGH PROFIT WAS DUE TO EXTRAORDINARY ARRANGEMENT BETWEEN THE ASSESS EE AND THE GERMAN COMPANY ENTERED INTO ONLY WITH A VIEW TO BOOST THE PROFITS OF ASSESSEE AND THEREFORE ALLOWING DEDU CTION OF RS. 20,54,27,335/- ? (B) IN HOLDING THAT THE THERE WAS NO MATERIAL AVAIL ABLE WITH THE A.O. TO ESTIMATE THE PROFITS OF THE 10A UNIT ELIGIB LE FOR DEDUCTION INVOKING THE PROVISIONS OF S.80 IA(10) RE AD WITH S.10A(7) OF THE ACT WAS BASED ON PROPER AND REASONA BLE APPRAISAL OF THE MATERIAL AVAILABLE ON RECORD? (C) IN HOLDING THAT THE DEDUCTION UNDER S. 10A OF T HE ACT HAS TO BE COMPUTED WITHOUT SETTING OFF OF THE LOSS FROM TH E TRADING UNIT AGAINST THE PROFITS OF THE EXPORT ORIENTED UNI T ENTITLED TO DEDUCTION UNDER S.10A OF THE ACT.? .. 8. SO FAR AS QUESTIONS (A) & (B) ARE CONCERNED, WE FIND THAT THE TRIBUNAL HAS CONSIDERED THE ENTIRE EVIDENCE AND ON FACTS COME TO THE CONCLUSION THAT THE PROFITS EARNED BY KANDLA DI VISION OF THE RESPONDENT-ASSESSEE IS NOT ABNORMALLY HIGH DUE TO A NY ARRANGEMENT BETWEEN THE RESPONDENT-ASSESSEE AND ITS GERMAN PRINCIPAL. THE TRIBUNAL CORRECTLY HELD THAT EXTRAOR DINARY PROFITS CANNOT LEAD TO THE CONCLUSION THAT THIS IS AN ARRAN GEMENT BETWEEN THE PARTIES. THIS WOULD PENALIZE EFFICIENT FUNCTION ING. FURTHER, THE AUTHORITIES HAVE ALSO RECORDED A FINDING THAT THE I NDUSTRIAL SEWING MACHINE NEEDLES IMPORTED AND TRADED BY THE MUMBAI D IVISION ARE DIFFERENT FROM THOSE MANUFACTURED & EXPORTED BY THE KANDLA DIVISION. CONSEQUENTLY, THIS ALSO NEGATIVES ANY ARR ANGEMENT BETWEEN THE PARTIES TO SHOW EXTRAORDINARY PROFITS I N RESPECT OF ITS KANDLA DIVISION SO AS TO CLAIM DEDUCTION UNDER SECT ION 10A OF THE ACT. THESE ARE FINDINGS ONE OF FACT. THE APPELLANT- REVENUE HAVE NOT BEEN ABLE TO SHOW THAT THE FINDINGS ARE PERVERS E OR ARBITRARY. IN THE CIRCUMSTANCES, QUESTIONS (A) AND (B) AS FORM ULATED BY THE APPELLANT/REVENUE DO NOT RAISE SUBSTANTIAL QUESTION S OF LAW IN THE PRESENT FACTS AND ARE THEREFORE DISMISSED. 24. NOW, LET US REVERT TO THE FACT OF THE PRESENT C ASE. AS OBSERVED EARLIER, THAT THE ASSESSEE HAD MADE INTERNATIONAL T RANSACTIONS EXCEEDING RS.15 CRORES WITH ITS AE. THE LEARNED AO HAD MADE ITA NO.2629/AHD/2014 (KIRAN JEWELLERY)-3 17 REFERENCE TO THE TPO FOR DETERMINATION OF ARMS LEN GTH PRICE OF THE INTERNATIONAL TRANSACTION. ON AN ANALYSIS OF TRANS ACTION WITH THE AE, THE LD.TPO HAS ARRIVED AT A CONCLUSION THAT THE TRANSAC TION IS AT ARMS LENGTH, BUT HE FOUND THAT PROFITS OF THE ASSESSEE A RE MORE THAN THE ORDINARY PROFITS IN THIS LINE, AND THEREFORE, HE MA DE OBSERVATIONS THAT THE PROVISIONS OF ACT DOES NOT ALLOW TPO TO MAKE AN Y ADJUSTMENT IN THE DOMESTIC TRANSACTION. IT IS FOR THE AO TO VERIFY T HE CLAIM OF THE ASSESSEE UNDER SECTION 10AA(9) R.W.S. 80IA(10). TH E LD.AO, ON AN ANALYSIS OF THE TPOS OBSERVATION, FOUND THAT THE AS SESSEE HAD MADE PURCHASES OF POLISHED DIAMONDS WORTH RS.170.75 CROR ES. THE PURCHASE TO THE TUNE OF RS.167.50 CRORES WERE MADE BY THE AS SESSEE FROM THE DOMESTICALLY RELATED PARTY, M/S.KGPL. IN ORDER TO VERIFY THE SALE PRICE OF THE RAW-MATERIAL TO THE ASSESSEE, THE LD.AO HAD ISSUED A NOTICE UNDER SECTION 133(6) DATED 28.1.2013 TO M/S.KGPL DIRECTIN G IT TO FILE FOLLOWING INFORMATION: I) PLEASE SUBMIT THE DETAILS OF RAW-MATERIAL SALE MADE TO M/S.KIRAN JEWELLERY IN QUANTITY, QUALITY AND IN VAL UE FOR EACH RAW MATERIAL. II) PLEASE SUBMIT THE DETAILS OF SALE OF SIMILAR RAW MA TERIAL MADE TO OTHER UNRELATED PARTIES BY YOU DURING THE Y EAR IN QUANTITY, QUALITY AND IN VALUE RAW MATERIAL WISE. III) PLEASE GIVE THE WORKING OF G.P. EARNED ON SALE OF R AW MATERIAL TO M/S.KIRAN JEWELLERY AS WELL AS G.P. EAR NED ON RAW MATERIAL SALE TO UNRELATED PARTIES. IV) COPY OF YOUR TAX AUDIT REPORT. 25. ACCORDING TO THE AO, IN RESPONSE TO THIS NOTICE , NO REPLY WAS SUBMITTED BY KGPL, BUT, ULTIMATELY, THE ASSESSEE HA S FORWARDED COPY OF THE REPLY GIVEN BY M/S.KGPL DATED 18.3.2013. THE L EARNED AO HAS REPRODUCED THE REPLY GIVEN BY THE ASSESSEE IN TWO L ETTERS DATED 18.3.2013 AND 19.3.2013. THESE REPLIES READ AS UND ER: REGARDING THE CAPTIONED NOTICE, PLEASE FIND OUR P OINT WISE REPLY AS UNDER: ITA NO.2629/AHD/2014 (KIRAN JEWELLERY)-3 18 1. WE HAVE SUBMITTED THE LIST OF THE BY US TO KIRAN JE WELRY, THE LIST CONTAINS DETAILS OF VALUE, QUANTITY ETC. REGARDING DETAILS OF THE QUANTITY, WE ARE ENCLOSING THE COPIES OF THE INVOIC E. THE INVOICES CONTAIN THE LIST OF THE DIAMONDS SOLD BY US WITH SP ECIFICATIONS. 2. WE ARE SUBMITTING HEREWITH, A LIST CONTAINING DETAI LS OF THE SALES MADE TO INDEPENDENT THIRD PARTIES DURING THE YEAR. THE LIST CONTAINS THE DETAILS WITH RESPECT TO VALUE, QUANTIT Y ETC. FURTHER, WE ARE ALSO GIVING INVOICES OF THE SALES MADE TO TH IRD PARTIES WHICH CONTAIN THE DESCRIPTION/DETAILS AND QUALITY O F THE GOODS SOLD. WE HAD ALREADY SUBMITTED A SUMMARY CHART SHOWING TH E AVERAGE RATE OF SALE PER CARAT MADE TO KIRAN AND AVERAGE RA TE OF SALE PER CARAT MADE TO INDEPENDENT THIRD PARTIES. YOUR HONO UR CAN OBSERVE THAT THE RATE OF SALE MADE TO KIRAN JEWELLE YR IS SUBSTANTIALLY HIGHER THAN THE RATE PER CARAT FOR SA LES MADE TO INDEPENDENT THIRD PARTIES. APART FROM ABOVE, WE HAVE TO STATE THAT THE COMPARA BILITY AS REQUIRED BY YOUR HONOUR CANNOT BE ESTABLISHED SIMPL Y BECAUSE OF THE FOLLOWING REASONS- IN A SINGLE INVOICE LARGE NUMBER OF GOODS ARE SELEC TED AND SOLD TO A PARTY WHICH IS CLEAR FROM THE SAMPLE INVO ICES GIVEN US. GENERALLY, THE BUYER MAKES SELECTION OF THE GO ODS BASED UPON HIS NEEDS FROM THE STOCK OFFERED TO HIM. CERTAIN BUYERS MAY CHOOSE AND PICK WHILE FOR THE CE RTAIN BUYERS, IT IS BUYING THE ENTIRE LOT AT A BARGAIN VA LUE WITHOUT CHOOSING. OBVIOUSLY, THE RATE FOR THE FIRST ONE WI LL BE HIGHER WHILE THE RATE FOR THE LATER ONE WILL BE LOWER AND WILL DEPEND UPON THE MARKET CONDITIONS AND VARIETY OF OTHER FAC TOR. THE PRICE OF THE DIAMOND IS A SUBJECTIVE MATTER. THE V ALUE OF THE DIAMOND LIES ON THE EYES OF THE BEHOLDER. EVEN TWO PROFESSIONALS WOULD PUT A DIFFERENT VALUE TO THE SA ME SET OF DIAMONDS. THOUGH THERE ARE LAID DOWN SPECIFICATION S FOR DIAMONDS, EVEN WITHIN SAME SET OF SPECIFICATIONS, T HE VALUE OF DIAMONDS CAN VARY UPTO 30% ****. WE ARE INVITIN G THE ATTENTION OF YOUR HONOUR TO LARGE ONLINE DIAMOND SE LLING SITE RAPPORT (HTT://WWW.DIAMONDS.NET/). WE ARE ENCLOSIN G THE SNAP SHOT OF TWO OFFERS FOR SALE FROM THE WEBSITE. YOU CAN OBSERVE THE DIFFERENCE IN PRICE DESPITE SAME QUALIT Y AND SPECIFICATIONS. YOUR HONOUR MAY NOTE THAT RAPPORT IS THE LARGE ONLINE DIAMOND SELLING WEBSITE WITH SALES EXC EEDING BILLIONS OF DOLLARS IN VALUE. FURTHER, ONLY CERTIF IED DIAMONDS ARE BEING LISTED ON THE SITE WHEREAS IN OUR CASE, W E DO NOT ITA NO.2629/AHD/2014 (KIRAN JEWELLERY)-3 19 RESORT, TO CERTIFICATION AS THE COST AND TIME INVOL VED IN GETTING THE CERTIFICATION IS PROHIBITIVE COMPARED T O THE VOLUMES AND RATES WHICH WE DEAL IN. IT IS DIFFICULT TO FIND OUT THE SALE OF SAME SPECIF ICATIONS AT THE SAME POINT OF TIME THE TIME IS EQUALLY RELEVAN T BECAUSE THERE ARE SEVER FLUCTUATIONS IN THE PRICES OF DIAMO NDS, IF THE TIME PERIOD IS DIFFERENT THE COMPARISON IS NOT POSS IBLE. 3. IN ADDITION TO OUR EARLIER SUBMISSION WE EMPHASIZIN G THAT, WE HAD ALSO SUBMITTED OUR TRANSFER PRICING ORDER FOR T HE RELEVANT YEAR, WHICH ACCEPTS THE FACT THAT OUR TRANSACTIONS WITH ASSOCIATES ARE AT ARMS LENGTH. THIS EFFECTIVELY DISCHARGES THE ONUS LAID UPON US AND ESTABLISHES OUR ARMS LEN GTH DEALINGS WITH OUR ASSOCIATES. REPLY, DATED 20/03/2013. SUBJECT:- ASSESSMENT PROCEEDINGS FOR A.Y.2009-10 SU BMISSION OF FURTHER DETAILS. PLEASE FIND THE BELOW MENTIONED INFORMATION AS REQU IRED BY YOUR HONOUR PURSUANT TO LAST PERSONAL HEARING. 1. REGARDING THE REPLY SUBMITTED BY M/S.KIRAN GEMS PVT . LTD. PURSUANT TO NOTICE U/S.133(56). WE HAVE TO FURTHER ADD THAT THE GP DISCLOSED BY M/S.KGPL @ 12.44%. THIS GP IS VERY MUCH COMPARABLE TO GPS DISCLOSED BY SIMILAR UNITS. FURTHER ON GROSS BASIS ALSO (PER CARAT), THE RATE CHARGED BY K GPI FROM US IS SUBSTANTIALLY ON HIGHER SIDE COMPARED TO INDEPEN DENT SALES. ACCORDINGLY, THERE CANNOT BE ANY PRESUMPTION WITH R ESPECT TO SALES MADE BY KGPL TO US. 2. FURTHER, THE OBSERVATION OF THE TPO IN THE TP ORDER THAT PROFITS EARNED BY THE ASSESSEE ARE MORE THAN THE ORDINARY P ROFITS WHICH MIGHT BE EXPECTED TO ARISE IN THIS BUSINESS IF NOT WITH SOUND REASONING OR BASE. IN THIS CONNECTION, WE HAVE TO HUMBLY SUBMIT AS UNDER:- I) THE OBSERVATION OF THE TPO IS BASED UPON THE AVERAG E WORKED OUT BY TPO FROM THE COMPARABLE SELECTED FROM PUBLIC DATABASES. THE PUBLIC DATABASE USED HERE B Y TPO IS PROWESS. REGARDING PROWES OR FOR THAT MATTER EVEN CAPITALINE (TWO WIDELY USED DATABASES IN INDIA), WE HAVE TO HUMBLY SUBMIT THAT THERE ARE NO MORE THAN 120 COMPA NIES UNDER THE BROAD HEAD OF GEMS AND JEWELERY SECTOR. ITA NO.2629/AHD/2014 (KIRAN JEWELLERY)-3 20 THIS NUMBER IS COMBINED FOR BOTH GEMS (DIAMOND MANUFACTURING, TRADING) AND JEWELLERY SEGMENT TOGET HER. OUT OF SUCH 120 COMPANIES THERE ARE FEW MISCLASSIFI ED COMPANIES AND FEW COMPANIES ARE GENERALLY DEFUNCT. THE DATABASE COVERS PUBLICLY LISTED COMPANIES. THE DAT ABASE DOES NOT COVER NON-CORPORATE ENTITIES. II) THE DATA BASE IS NEITHER REPRESENTATIVE OF THE INDU STRY NOR DO IT PROVIDE AN INSIGHT IN THE O0WRKING OF THE IND USTRY AND MARGIN EARNED BY INDUSTRY DUE TO FOLLOWING REASONS: THE DATABASE IS VERY SMALL AND IS NOT REPRESENTATIV E OF THE LARGE JEWELLERY INDUSTRY IN THE COUNTRY. THE DATAB ASE ONLY HAS VERY SMALL NUMBER OF COMPANIES (NOT MORE THAN 2 0 ) WHICH ARE ENGAGED IN JEWELLERY MANUFACTURING (DEDIC ATED). COMPOSED TO ACTUAL NUMBER OF UNITS OPERATING IN THE COUNTRY, THIS INSIGNIFICANT AND ANY CONCLUSION DRAW N ON SUCH DATABASE IS LIKELY TO BE SKEWED AND NON-REPRESENTAT IVE OF BROAD AND DIVERSE NATURE OF THE INDUSTRY. THE DATA BASE ONLY COVERS LIMITED COMPANIES AND EVE N DEFUNCT LISTED COMPANIES. WHEN WE COMPARE THE NET MARGINS OF CORPORATE ENTITIES WITH NON-CORPORATE EN TITIES, THERE ARE SIGNIFICANT DIFFERENCE WITH RESPECT TO MA NAGERIAL REMUNERATION AND GENERAL CORPORATE GOVERNANCE EXPEN SES, LISTING EXPENSES ETC. WHICH ARE PECULIAR TO CORPORA TE ENTITIES BUT SUCH EXPENSES ARE ABSENT IN CASE OF NON-CORPORA TE ENTITIES. ACCORDINGLY, THE RESULTS ARE NON-COMPARA BLE. CERTAIN COMPARABLE SELECTED BY TPO SUFFERS FROM SEV ERE LIMITATIONS MAKING IT A WRONG CHOICE AS COMPARABLE VIZ. SR.NO. NAME OF COMPARABLE INFIRMITIES/OBSERVATIONS 1. DIAGOLD DESIGNS LTD. THIS IS A SUBSIDIARY OF M/S.GOLDDISM INTERNATIONAL LTD. THE COMPANY IS INTO MANUFACTURING OF JEWELLERY (MAJOR ACTIVITY) AND HAS ALSO ENGAGED ITSELF INTO TRADING OF DIAMONDS AND GOLD (SIGNIFICANT) THE COMPANY HAS ITA NO.2629/AHD/2014 (KIRAN JEWELLERY)-3 21 SIGNIFICANT SALE & PURCHASE TRANSACTIONS WITH ASSOCIATES BOTH OVERSEAS AND DOMESTIC. 2. FINE JEWELLERY (INDIA) LTD. THE COMPANY IS INTO MANUFACTURING OF JEWELLERY (MAJOR) TRADING OF DIAMONDS (SIGNIFICANT) SEGMENT WISE RESULTS ARE UNAVAILABLE. THERE ARE SIGNIFICANT SALES TO AE. 3. RENAISANCE JEWELLERY LTD. THE COMPANY IS INTO MANUFACTURING OF JEWELLERY. HOWEVER, THE COMPANY HAS VERY SUBSTANTIAL TRANSACTIONS WITH VERSES AND RESIDENTS AE. 4. SHREE GANESH JEWELLERY HOUSE LTD. THE COMPANY IS INTO I) MANUFACTURING AND TRADING OF GOLD JEWELLERY, ARTICLES AND MEDALLIONS (MAJOR). TRADING ALSO CONSTITUTES A SIGNIFICANT PORTION. II) MANUFACTURING AND SELLING OF PRECIOUS AND SEMI-PRECIOUS STONES (SUBSTANTIAL) SEGMENT WISE RESULTS WITH RESPECT TO TRADING OF GOLD JEWELLERY AND PRECIOUS AND SEMI- PRECIOUS STONES AND MANUFACTURING ACTIVITY IS NOT AVAILABLE. 5. GOLDDIAM JEWELLERY LTD. THIS IS A SUBSIDIARY OF M/S.GODDIAM INTERNATIONAL LTD. ITA NO.2629/AHD/2014 (KIRAN JEWELLERY)-3 22 THE MANUFACTURING IS ONLY INTO JEWELLERY MANUFACTURING. SUBSTANTIAL SALES & PURCHASE TRANSACTIONS WITH OVERASEAS AND DOMESTIC ASSOCIATES MAKING IT NON- COMPARABLE. SINCE THE TPO HAD UNILATERALLY SELECTED THE COMPARA BLES AND COMPUTED THE AVERAGES, WE DID NOT GET THE OPPORTUNI TY TO POINT OUT THE INFIRMITIES IN THE SELECTION OF COMPA RABLE. (III) WE HAVE RESEARCHED THE PUBLICITY AVAILABLE DA TA SOURCES LIKE REGISTRAR OF COMPANIES, DATABASE OF RA TING AGENCIES (THOUGH NOT EXHAUSTIVE). HOWEVER, WE HAVE BEEN ABLE TO SOURCE COMPANIES WHICH HAVE DISCLOSED SIMIL AR OPERATING MARGINS AS OURS. SR.NO. NAME OF COMPARABLE OPBDITA/OL(OPERATING PROFIT BEFORE DEPRECIATION INTEREST & TAX/ OPERATING INCOME (SALES) 1. KIRAN JEWELLERY 23.76% 2. ALUKAS JEWELLERY 20.5% 3. CHALLANI JEWELLERY (F.Y.209-10) 24% 4. GUNJAN EXPORTS 22.10% 5. KALYAN EXPORTERS & IMPORTERS (F.Y.2009-10 22.00% 6. CC. MAHEDENRA INFOJEWELLS LTD. 24.50% 7. SUNJEWELS INTERNATIONAL LTD. 22.25% 8. ELEGANZA JEWELLERY P.LTD. 20.82% 9. C12 JEWLLERY P.LTD. (OPBDT/OI) 17.10% NOTE: THE COMPARISON MADE BY TPO IS OPERATING PROFIT/OPERATING COSTS AND THEREFORE THE FIGURES AR E DIFFERENT. HOWEVER, SINCE OPERATING COSTS MAY NOT BE ITA NO.2629/AHD/2014 (KIRAN JEWELLERY)-3 23 WORKABLE IN ALL CASES DUE TO LACK OF DETAILS, THE O PERATING PROFIT/OPERATING INCOME HAS BEEN WORKED OUT. THUS IT CAN BE SEEN FROM ABOVE THAT THER EARE NUMEROUS COMPANIES EARNING NET MARGINS SIMILAR TO OURS. THUS, THE ALLEGATIONS OF THE AO . 26. THE LEARNED AO HAS GONE THROUGH THE REPLIES OF THE ASSESSEE AND ULTIMATELY REJECTED THEM. THE REASONS ASSIGNED BY THE AO CAN BRIEFLY BE NOTED AS UNDER: A) THE KGPL HAS FAILED TO SUBMIT REQUISITE DETAILS WEL L IN TIME WHICH PROHIBITS THE AO TO CARRY OUT THE INQUIRIES; B) THE ASSESSEE FAILED TO PRODUCE COMPLETE SALE INVOIC ES OF THE SISTER CONCERNS I.E. KGPL WITH REGARD TO THE SALES MADE TO THE ASSESSEE AS WELL AS TO UNRELATED PARTIES; C) THE ASSESSEE FAILED TO PROVE THE CORRECTNESS/REASON ABILITY OF THE PURCHASES MADE FROM SISTER CONCERNS; D) IN THE SAMPLE INVOICES PRODUCED BY THE ASSESSEE, TH ERE IS CO- RELATION BETWEEN THE RAW-MATERIALS SPECIFIED IN THE SALE BILL TO THE ASSESSEE WITH THAT OF SALE BILL OF UNRELATED PA RTIES; E) AS FAR AS THE DETAILS SUBMITTED BY THE ASSESSEE IN TABULAR FORM EXHIBITING THE AVERAGE SALE RATE TO THE ASSESSEE AN D SOLD TO UNRELATED PARTY BY KGPL IS CONCERNED, THE ASSESSEE HAS JUST GENERALIZED THE MATTER FORGETTING THE FACT THAT THE DIAMOND IS PRECIOUS METAL, WHICH FETCHES THE PRICE ACCORDING T O ITS QUALITY. TWO DIAMONDS OF SAME CARAT CAN FETCH DIFFERENT PRIC E. AS FAR AS COMPARISON OF GP EARNED BY THE SISTER CONCERNS, VIZ. KGPL AND OTHER CONCERNS IS CONCERNED, IT IS WITHOUT ANY BASIS, BECAUSE, THE KGPL HAS ACHIEVED HUGE TURNOVER, ITS R ESULT CANNOT BE COMPARED WITH THE CONCERN HAVING LOW TURN OVER. THE ASSESSEE DID NOT GIVE DETAILS OF GP EARNED BY T HE SISTER CONCERN ON THE SAME MATERIAL SOLD TO THE ASSESSEE A S WELL AS UNRELATED PARTIES. F) THE ASSESSEE, ON ONE HAND, SUBMITTED THAT IT IS NOT PRACTICALLY POSSIBLE TO BIFURCATE THE GP EARNED BY KGPL ON THE MATERIAL SOLD TO THE ASSESSEE AND UNRELATED PARTIES. ON THE OTHER HAND, IT IS TRYING TO SAY THAT THE AVERAGE PER CARAT DIAM OND SOLD TO THE ASSESSEE BY KGP IS HIGHER THAN THE AVERAGE PER CARAT RATE TO OTHER CONCERNS. THIS CONTENTION IS CONTRADICTOR Y. ITA NO.2629/AHD/2014 (KIRAN JEWELLERY)-3 24 27. OTHER CONCLUSIONS OF THE ASSESSEE ARE SUMMARIZE D BY THE LD.AO HIMSELF IN PARA-9, WHICH READ AS UNDER: 28. IN VIEW OF THE ABOVE FACTS AND DISCUSSION HELD, THE ISSUES IN THIS CASE CAN BE SUMMARIZED AS UNDER: (I) ASSESSEE IS AVAILING EXEMPTION U/S.10AA OF THE ACT AND ITS ENTIRE PROFIT IS EXEMPT FROM TAXATION. DURING THE Y EAR, THE ASSESSEE HAS MADE ALMOST THE ENTIRE PURCHASE FROM I TS SISTER CONCERN, M/S KIRAN GEMS PVT LTD, WHICH IS NO T AVAILING ANY EXEMPTION UNDER THE I.T.ACT AND HAS DECLARED A PROFIT OF 12%. WHEREAS, HAS EARNED A PROFIT. @ 29.70%, WHI CH IS THE PROFIT RATIO WORKED OUT ON OPERATING PROFIT (OP ) DIVIDED BY OPERATING COST( OC),( 23.67% WHILE THE PROFIT RA TIO IS WORKED OUT ON OPERATING PROFIT DIVIDED BY OPERATING INCOME (OC) IN RESPECT OF ITS INTERNATIONAL TRANSACTIONS W HICH IS MORE THAN THE AVERAGE PROFIT EARNED BY OTHER CONCER NS INVOLVED IN SIMILAR KIND OF BUSINESS, HENCE OWING T O CLOSE CONNECTION BETWEEN THE ASSESSEE AND ITS SISTER CONC ERN, THERE IS SHIFTING OF PROFITS FROM ITS SISTER CONCER N TO THE ASSESSEE CLAIMING FOR TAX EXEMPTION, WITH THE HIGHE R MARGIN OF PROFIT EARNED FROM THE INTERNATIONAL TRANSACTION S IN COMPARISON TO OTHER COMPARABLES, BECAUSE THE ASSESS EE AND ITS SISTER CONCERNS AS MENTIONED ABOVE IN THIS ORDER DELIBERATELY FAILED TO PROVE THE RELEVANT DETAILS T O EXAMINE THE REASONABILITY OF THE TRANSACTIONS WITH ITS SIST ER CONCERNS. (II) BY NOT FURNISHING THE DETAILS AS REQUIRED VIDE NOTI CE U/S.133(6) OF THE AT FURTHER REINFORCE THE BELIEF T HAT ASSESSEE HAS DELIBERATELY AVOIDED TO FURNISH THE IN FORMATION AS CALLED DURING THE COURSE OF ASSESSMENT PROCEEDIN GS. AS A RESULT THE ACTUAL QUANTUM OF SUPPRESSION OF PROFI TS IN THE SISTER CONCERN AND ITS SHIFTING TO THE ASSESSEE CON CERN COULD NOT BE DETERMINED. IN SPITE OF GIVING NUMBER OF OPPORTUNITIES THE ASSESSEE FAILED TO PROVIDE THE RE LEVANT INFORMATION TO PROVE THE GENUINENESS AND REASONABLE NESS AS GENERALLY INFORMATION AVAILABLE IN THIS NATURE O F BUSINESS HAS BEEN DELIBERATELY NOT DISCLOSED BY THE ASSESSEE . (III) FURTHER THE COMPARABLES FURNISHED BY THE ASSESSEE A RE ALSO NOT FULLY RELIABLE, BECAUSE, EXCEPT IN 6 CASES ALL COMPARABLES PERTAINS TO A.Y.2010-11 AND ONWARDS. THE G.P. IN E ACH YEAR MAY BE VARIED FROM YEAR TO YEAR DEPENDING UPON THE MARKET FACTORS PREVAILING AT THE RELEVANT POINT OF TIME. HENCE, FOR A TRUE AND FARE COMPARISON, THE COMPARAB LE PROVIDED SHOULD PERTAIN TO THE SAME A.Y. WITHOUT P REJUDICE ITA NO.2629/AHD/2014 (KIRAN JEWELLERY)-3 25 TO THE ABOVE, THE AVERAGE PROFIT AS DECLARED IN ALL THE COMPARABLES NOT EXCEED THE PROFIT MARGIN OF 20.83%. (IV) THE PRINCIPLE OF RES-JUDICATA IS NOT APPLICABLE TO INCOME TAX PROCEEDINGS. THE CONTENTION OF THE ASSESSEE THAT T HE ASSESSMENT FOR A.Y.2008-09 WAS ACCEPTED AS SUCH BY THE ASSESSING OFFICER IS NOT VALID REASON FOR NON-INVOK ING OF PROVISIONS U/S.80IA(10) OF THE I.T.ACT. IT IS EVID ENT FROM THE FACTS AND CIRCUMSTANCES MENTIONED IN THIS CASE THAT ASSESSEE HAS MADE MORE THAN 98% PURCHASES FROM SIST ER CONCERN AND DELIBERATELY FAILED TO PROVIDE THE RELE VANT INFORMATION TO PROVE THE GENUINENESS OF THESE TRANS ACTIONS. 29. THE LD.AO HAS REJECTED THE BOOKS OF ACCOUNTS OF THE ASSESSEE, AND THEREAFTER MADE DOWNWARD ADJUSTMENT IN THE PROFITS OF THE ASSESSEE FOR CALCULATING THE EXEMPTION ADMISSIBLE TO THE ASSESSE E UNDER SECTION 10AA OF THE INCOME TAX ACT. THE SECTION 145 OF THE INCOME TAX ACT HAS A DIRECT BEARING WITH REGARD TO THE REJECTION O F THE BOOKS OF ACCOUNTS OF THE ASSESSEE, THEREFORE, IT IS PERTINEN T TO TAKE NOTE OF THIS SECTION. IT READS AS UNDER: '145(1) INCOME CHARGEABLE UNDER THE HEAD PROFITS A ND GAINS OF BUSINESS OR PROFESSION OR INCOME FROM OTHER SOURC ES SHALL, SUBJECT TO THE PROVISIONS OF SUB-SECTION (2), BE CO MPUTED IN ACCORDANCE WITH EITHER CASH OR MERCANTILE SYSTEM OF ACCOUNTING REGULARLY EMPLOYED BY THE ASSESSEE. (2) THE CENTRAL GOVERNMENT MAY NOTIFY IN THE OFFICI AL GAZETTE FROM TIME TO TIME ACCOUNTING STANDARDS TO BE FOLLOW ED BY ANY CLASS OF ASSESSEES OR IN RESPECT OF ANY CLASS OF IN COME. (3) WHERE THE ASSESSING OFFICER IS NOT SATISFIED AB OUT THE CORRECTNESS OR COMPLETENESS OF THE ACCOUNTS OF THE ASSESSEE, OR WHERE THE METHOD OF ACCOUNTING PROVIDED IN SUB-SECT ION (1) OR ACCOUNTING STANDARDS AS NOTIFIED UNDER SUB-SECTION (2), HAVE NOT BEEN REGULARLY FOLLOWED BY THE ASSESSEE, THE ASSESS ING OFFICER MAY MAKE AN ASSESSMENT IN THE MANNER PROVIDED IN SE CTION 144.' 30. FROM THE BARE READING OF THIS SECTION, IT WOUL D REVEAL THAT IT PROVIDES THE MECHANISM HOW TO COMPUTE THE INCOME OF THE ASSESSEE. ACCORDING TO SUB-CLAUSE (I), THE INCOME CHARGEABLE UNDER THE HEAD 'PROFITS AND GAINS OF THE BUSINESS OR PROFESSIONS O R INCOME FROM OTHER ITA NO.2629/AHD/2014 (KIRAN JEWELLERY)-3 26 SOURCES' SHALL BE COMPUTED IN ACCORDANCE WITH THE M ETHOD OF ACCOUNTANCY EMPLOYED BY AN ASSESSEE REGULARLY SUBJE CT TO THE SUB- SECTION (2) OF SECTION 145 OF THE ACT. SUB-SECTION (2) PROVIDES THAT THE CENTRAL GOVERNMENT MAY NOTIFY IN THE OFFICIAL GAZET TE FROM TIME TO TIME THE ACCOUNTING STANDARD REQUIRED TO BE FOLLOWED BY ANY CLASS OF ASSESSEE IN RESPECT OF ANY CLASS OF INCOME. THUS, I T INDICATES THAT INCOME HAS TO BE COMPUTED IN ACCORDANCE WITH THE ME THOD OF ACCOUNTANCY FOLLOWED BY AN ASSESSEE, I.E., CASH OR MERCANTILE. SUCH METHOD HAS TO BE FOLLOWED KEEPING IN VIEW THE ACCOU NTING STANDARD NOTIFIED BY THE CENTRAL GOVERNMENT FROM TIME TO TIM E. SUB-CLAUSE (3) PROVIDES A SITUATION, I.E., IF THE ASSESSING OFFICE R IS UNABLE TO DEDUCE THE TRUE INCOME ON THE BASIS OF METHOD OF ACCOUNTANCY F OLLOWED BY AN ASSESSEE THEN HE CAN REJECT THE BOOK RESULTS AND AS SESS THE INCOME ACCORDING TO HIS ESTIMATE OR ACCORDING TO HIS BEST JUDGMENT. THE ASSESSING OFFICER IN THAT CASE IS REQUIRED TO POINT OUT THE DEFECTS IN THE ACCOUNTS OF ASSESSEE AND REQUIRED TO SEEK EXPLANATI ON OF THE ASSESSEE QUA THOSE DEFECTS. IF THE ASSESSEE FAILED TO EXPLAI N THE DEFECTS THEN ON THE BASIS OF THE BOOK RESULTS, INCOME CANNOT BE DET ERMINED AND ASSESSING OFFICER WOULD COMPUTE THE INCOME ACCORDIN G TO HIS ESTIMATION KEEPING IN VIEW THE GUIDING FACTOR FOR ESTIMATING S UCH INCOME. 31. A PERUSAL OF THE ASSESSMENT ORDER, WE FIND THAT THE LD.AO HAS NOT POINTED OUT ANY DEFECTS IN THE BOOKS OF ACCOUNTS OF THE ASSESSEE IN BOTH THE ASSESSMENT YEARS. HE SIMPLY OBSERVED THAT THE BOOKS OF ACCOUNTS ARE REJECTED AND PROFIT OF THE ASSESSEE IS BEING ES TIMATED. 32. THE NEXT ASPECT OF THE MATTER IS THAT, AS OBSER VED EARLIER, IT IS TO BE DEMONSTRATED ON THE RECORD THAT THE ASSESSEE HAS ARRANGED COURSE OF ITS BUSINESS AFFAIRS IN SUCH A MANNER WITH THE A E THAT RESULTED IN EXTRAORDINARY PROFITS TO THE ASSESSEE. IT IS THE AO, WHO HAS ALLEGED THAT, THE PROFITS SHOWN BY THE ASSESSEE ARE EXTRAOR DINARY WHICH DESERVE TO BE SCALED DOWN AS PROVIDED IN SECTION 80IA(10), AND THEREAFTER, ITA NO.2629/AHD/2014 (KIRAN JEWELLERY)-3 27 ELIGIBLE DEDUCTION WOULD BE COMPUTED UNDER SECTION 10AA OF THE INCOME TAX ACT. THE ONUS IS UPON THE AO TO BRING THE DEMO NSTRATIVE EVIDENCE ON RECORD INDICATING THE FACTOR THAT THE ASSESSEE H AS ARRANGED THE COURSE OF ITS BUSINESS AFFAIRS IN SUCH A MANNER WHI CH RESULTED EXTRAORDINARY PROFIT TO IT. WE FIND THAT THE LD.AO HAS NOT MADE REFERENCE TO ANY SUCH MATERIAL. HE SIMPLY MADE FOL LOWING OBSERVATIONS IN PARA-13 OF THE ASSESSMENT ORDER PASSED IN THE AS STT.YEAR 2009-10. 13. IN THE CASE OF THE ASSESSEE THERE IS A CLOSE B USINESS CONNECTION BETWEEN THE ASSESSEE AND ITS ASSOCIATE C ONCERN KIRAN GEMS P.LTD. AS MORE THAN 98% OF THE PURCHASE HAS BE EN MADE FORM ITS ASSOCIATE CONCERN AND BECAUSE OF 100% EXEM PTION AVAILABLE TO THE ASSESSEE IT HAS SHOWN MORE THAN TH E ORDINARY PROFIT AS STATED ABOVE IN THIS ORDER. IN OTHER WOR DS, THE REQUIRED DETAILS HAVE NOT BEEN PROVIDED BY M/S.KIRAN GEMS P. LTD., WHICH IS VERY CRUCIAL IN DETERMINING THE SUPPRESSION OF COST IN RESPECT OF THE RAW MATERIAL PURCHASE BY THE ASSESSEE DURING TH E YEAR AS THE BUSINESS BETWEEN THEM WAS ARRANGED IN SUCH A MANNER TO INFLATE THE PROFIT OF THE ASSESSEE, BECAUSE OF 100% EXEMPTI ON AVAILABLE. 33. A PERUSAL OF THE ABOVE FINDING WOULD INDICATE T HAT THE LD.AO HAS NOT MADE REFERENCE TO ANY MATERIAL EXHIBITING THE F ACT THAT THE COURSE OF BUSINESS AFFAIRS WAS SO ARRANGED BETWEEN THE ASS ESSEE AND M/S.KGPL WHICH HAS GIVEN RISE TO EXTRAORDINARY PROFIT TO THE ASSESSEE. 34. IN THE REASONING AS SUMMARIZED BY US, THE FIRST REASONS IS WITH REGARD TO ALLEGED NON-COMPLIANCE OF M/S.KGPL TO SUB MIT REQUISITE DETAILS WELL IN TIME BEFORE THE AO. THE AO HAS SPE CIFICALLY OBSERVED WITH REGARD TO THIS ASPECT IN SUB-PARA (II) OF PARA OF AT PAGE NO.20 OF THE ASSESSMENT ORDER IN THE ASSTT.YEAR 2009-10.A PE RUSAL OF THE ASSESSMENT ORDER WOULD REVEAL THAT THE ASSESSEE HAS FILED ITS RETURN FOR THE ASSTT.YEAR 2009-10 ON 17.2.2010. A NOTICE UNDER SECTION 143(2) OF THE INCOME TAX ACT WAS ISSUED ON 30.8.2010. ACCORDI NG TO THE SECTION 143(2),WHEN A CASE OF THE ASSESSEE IS SELECTED FOR SCRUTINY ASSESSMENT, HE IS BEING GIVEN AN OPPORTUNITY TO SUBMIT REQUISIT E DETAILS, WHICH HE WANTS TO ALLEGE IN SUPPORT OF HIS RETURN. THUS, THI S IS THE FIRST NOTICE, ITA NO.2629/AHD/2014 (KIRAN JEWELLERY)-3 28 WHICH EMPOWERS THE AO TO SCRUTINIZE THE RETURN AND GIVE AN OPPORTUNITY TO THE ASSESSEE. WHAT HE WANTS TO SUBMIT IN SUPPOR T OF HIS RETURN. THIS NOTICE WAS ISSUED WITHIN SIX MONTHS FROM THE FILING OF THE RETURN. THEREAFTER, PROCEEDING REMAINED IN DORMANT FOR ALMO ST ONE YEAR. THE LD.AO HAD ISSUED QUESTIONNAIRE ON 12.9.2011 WHICH W AS ALLEGED TO HAVE BEEN SERVED UPON THE ASSESSEE. THE AO, THEREAFTER , ISSUED THE QUESTIONNAIRE UNDER SECTION 142(1) ON 8.1.2013. A PERUSAL OF THE PARA 4.3 OF THE ASSESSMENT, IT REVEALS THAT THE AO HAS I SSUED NOTICE UNDER SECTION 133(6) DATED 28.1.2013 ASKING FOR THE DETAI LS FROM M/S.KGPL. THE DETAILS SOUGHT BY THE AO ARE BEING EXTRACTED BY US IN PARA 25 OF THIS ORDER. THE LD.AO THEREAFTER, ALLEGED THAT THE SISTER CONCERN FAILED TO SUBMIT THE REQUISITE DETAILS, AND IT IS THE ASSE SSEE WHO HAS SUBMITTED THE INFORMATION ON BEHALF OF THE SISTER CONCERN. T HE REPLY TO THIS OBSERVATION OF THE AO BY THE ASSESSEE IS THAT M/S.K GPL HAD CHANGED ITS ADDRESS FROM EXISTING OFFICE AT PRASAD CHAMBERS, OP ERA HOUSE TO BKC IN MUMBAI. BECAUSE OF THIS CHANGE IN THE OFFICE AD DRESS, NOTICE ISSUED BY THE AO UNDER SECTION 133(6) RETURNED UN-SERVED, AND SINCE THE AO WAS IN URGENCY TO GET THE REPLY, THE ASSESSEE FACIL ITATED THE SAME BY FILING IT IN PERSON. THIS ASPECT CAN BE APPRECIATE D BY HIGHLIGHTING THE CIRCUMSTANCES THAT THE RETURN WAS FILED IN FEBRUARY , 2010. THE CASE WAS SELECTED FOR SCRUTINY AND NOTICE UNDER SECTION 143(2) WAS ISSUED IN AUGUST, 2010, AND THEREAFTER, THE LD.AO WAITED UPTO 12 TH SEPTEMBER, 2012 AND THEN ULTIMATELY STARTED SERIOUS INQUIRIES IN THE MONTH OF JANUARY, 2013. HE CALLED FOR THE DETAILS ON 28.01. 2013 KNOWING WELL THAT ASSESSMENT HAS TO BE PASSED BEFORE 31.3.2013. HOW IT CAN BE JUSTIFIED THAT THE COMPLIANCE OF A NOTICE ISSUED UN DER SECTION 133(6) WOULD BE MADE IMMEDIATELY? THE OTHER CONCERN, WHO HAD RECEIVED SUCH TYPE OF NOTICE WOULD ALWAYS REQUIRE TO GO THRO UGH THE NOTICE AND COLLECT MATERIALS FROM THE RECORD. MATERIAL HAS BE EN SUPPLIED BY THE ASSESSEE IN CONSONANCE WITH THE REQUIREMENT OF THE AO. THEREFORE, ITA NO.2629/AHD/2014 (KIRAN JEWELLERY)-3 29 THERE IS NO LAPSE EITHER AT THE END OF THE ASSESSEE OR AT THE END OF THE M/S.KGPL IN COMPLIANCE TO THE NOTICE ISSUED BY THE AO. 35. IT IS PERTINENT TO OBSERVE HERE THAT IF WE READ CONJOINTLY SECTIONS 145(3), 80IA(10), 10AA AND SECTION 143(3), THEN IT WOULD COME OUT THAT AFTER FILING OF THE RETURN, IF THE RETURN IS B EING SELECTED FOR SCRUTINY ASSESSMENT, THEN THE AO WOULD GIVE A NOTICE UNDER S ECTION 143(2) OF THE INCOME TAX ACT. THE OBJECT OF THIS NOTICE IS TO PROVIDE AN OPPORTUNITY TO THE ASSESSEE FOR MAKING ITS SUBMISSI ONS ALONG WITH MATERIAL IN SUPPORT OF THE RETURN. THE ASSESSEE HA S FILED SUBMISSIONS. IT HAS DISCHARGED ITS OBLIGATION. NOW, IT IS FOR T HE AO TO POINT OUT THE REASONS AS TO WHY HE IS NOT ABLE TO DEDUCE TRUE INC OME FROM THE ACCOUNTS OF THE ASSESSEE, AND THEREAFTER HE CAN REJ ECT THE BOOK RESULTS AND PROCEED TO DETERMINE THE INCOME ON AN ESTIMATE BASIS. SIMILARLY, FOR COMPUTING THE ELIGIBLE DEDUCTION ADMISSIBLE UND ER SECTION 10AA, IT IS FOR THE AO, WHO IS DOUBTING THE PROFITS DECLARED BY THE ASSESSEE, AND AS OBSERVED EARLIER, SECTION 80IA(10) AUTHORIZE THE AO TO MAKE DOWNWARD ADJUSTMENT IN THE PROFITS DECLARED BY THE ASSESSEE, BUT SUCH ADJUSTMENT CAN ONLY BE MADE IF IT IS ESTABLISHED ON THE RECORD BY THE AO THAT THE EXTRAORDINARY PROFITS ALLEGED TO HAVE BEEN RESULTED TO THE ASSESSEE IS THE RESULT OF THE ARRANGEMENT OF THE BUSINESS AFFAI RS IN A DUBIOUS MANNER WITH AN OBJECT OF ABUSING OF TAX CONCESSION. THE ASSESSEE HAS FULFILLED ITS PART OF OBLIGATION. IN OTHER WORDS, IT WAS NOT FOR THE ASSESSEE TO PRODUCE EVIDENCE JUSTIFYING ITS PROFIT RATIO, BECAUSE IT HAS COMPUTED THE PROFIT RATIO ON THE BASIS OF AUDITED B OOKS OF ACCOUNT. IT IS FOR THE LD.AO TO COLLECT EVIDENCE DEMONSTRATING THA T FROM BOOKS OF ACCOUNTS OF THE ASSESSEE TRUE INCOME CANNOT BE DEDU CTED. IT IS ALSO PERTINENT TO MENTION THAT THE LD.TPO DID NOT FIND A NY FLAW IN THE INTERNATIONAL TRANSACTION OF THE ASSESSEE FROM THE SAME BOOKS OF ACCOUNT. ITA NO.2629/AHD/2014 (KIRAN JEWELLERY)-3 30 36. THE SISTER CONCERN OF THE ASSESSEE I.E. KGPL WA S NOT UNDER ANY OBLIGATION TO SUBMIT THE DETAILS SUO MOTO UNLESS REQUIRED BY THE LD.AO BY ISSUANCE OF NOTICE UNDER SECTION 133(6) OF THE A CT. THE SIMPLE REASON IS THAT IN ITS CASE, ASSESSMENT WAS MADE WIT HOUT DOUBTING ANYTHING. ITS INTERNATIONAL TRANSACTION WITH AE WA S ALSO ACCEPTED WITHOUT ANY ADJUSTMENT. 37. THE LEARNED COUNSEL FOR THE ASSESSEE WHILE TAKI NG US THROUGH THE PAPER BOOK FOR THE ASSTT.YEAR 2010-11 CONTENDED THA T THE ASSESSEE HAS PRODUCED A REPORT AT PAGE NO.62 OF THE PAPER BOOK. THE SOURCE OF THIS REPORT IS FROM INTERNATIONAL MONETARY FUND (WORLD E CONOMIC OUTLOOK DATABASE, APRIL, 2013), BAIN ANALYSIS. THIS REPORT EXHIBITS THE VALUE ADDITION AT THE LEVEL OF EXPLORATION AND PRODUCTION OF ROUGH DIAMOND IS IN BETWEEN 14.8% TO 15.2%. AT THE LEVEL OF CUTTING AND POLISHING, IT IS 20.7% I.E. (FROM 15.2% TO 20.7% = 6%). AT THE LEVEL OF SELLING OF POLISHED DIAMONDS IT IS 22.6%. WHEN THE DIAMOND HA S BEEN CHANGED TO JEWELLERY BY MANUFACTURING, THE VALUE ADDITION W OULD ARISE TO 22% TO 47.2% , THE NET VALUE ADDITION IS 25% . THE MAXIMUM VALUE ADDITION AT THIS STAGE ITSELF IS 25%. SIMILAR ADDITIONS WHEN T HE DIAMOND IS BEING SOLD, IT IS FROM 47.2% TO 72%. ON THE STRENGTH OF THIS REPORT, HE SUBMITTED THAT THE PROFIT MARGIN AT THE LEVEL OF MA NUFACTURER IS HIGHEST, WHICH IS 25%. THE ASSESSEE IS A MANUFACTURER. THE LD.CIT(A) HAS ANALYSED THE RESULT OF M/S.KGPL, WHO IS ENGAGED IN THE BUSINESS OF CUTTING AND POLISHING OF DIAMONDS. THE VALUE ADDI TION AT THIS STAGE IS MINIMUM I.E. 6.8%. THEREFORE, BOTH THESE RESULTS A RE NOT COMPARABLE. ACCORDING TO THE LD.COUNSEL FOR THE ASSESSEE, THIS REPORT WAS BROUGHT TO THE NOTICE OF THE LD.CIT(A), BUT IT WAS IGNORED. 38. THE LD.DR, ON THE OTHER HAND, UNABLE TO CONTROV ERT THIS REPORT. SHE POINTED OUT THAT IT IS BASED ON SOME INTERNATIO NAL STUDY, BUT ITS AUTHENTICITY HAS NOT BEEN PROVED ON RECORD, AND IT IS JUST AN OPINION, WHICH CANNOT BE A GUIDING FACTOR. ON DUE CONSIDERA TION OF THE FACTS AND ITA NO.2629/AHD/2014 (KIRAN JEWELLERY)-3 31 THIS REPORT, WE ARE OF THE OPINION THAT IT IS A CIR CUMSTANTIAL EVIDENCE IN SUPPORT OF PROFIT RATIO SHOWN BY THE ASSESSEE AND I T IS FROM INDEPENDENT AGENCY. THUS, IT CAN BE USED FOR CORROBORATION PURP OSE. 39. THE NEXT EVIDENCE BROUGHT ON RECORD BY THE ASSE SSEE IS THE LIST OF AVERAGE SELLING PRICE OF M/S.KGPL PER CARAT CHARGED FROM THE ASSESSEE AS WELL AS INDEPENDENT BUYER. ACCORDING TO THE ASS ESSEE IT HAS PRODUCED THE AVERAGE SELLING PRICE PER CARAT CHARGE D BY M/S.KGPL FROM INDEPENDENT THIRD PARTY. SUCH REPORT HAS BEEN COMP ILED IN A PERIODICAL MANNER STARTING FROM 15.4.2008 TO 31.3.2009. THE R ATES CHARGED FROM THE ASSESSEE ARE HIGHER THAN THE INDEPENDENT PURCHA SERS. THUS, TO THE ASSESSEE, THERE IS NO CASE FOR ARRANGING THE AFFAIR S IN SUCH A MANNER THAT IT WOULD YIELD MORE THAN ORDINARY PROFITS TO T HE ASSESSEE. IN ORDER TO BUTTRESS THIS CONTENTION, THE LD.COUNSEL FOR THE ASSESSEE DREW OUR ATTENTION TOWARDS PAGE NOS.88 AND 91 OF THE PAPER B OOK, WHEREIN COMPLETE DETAILS OF THE SALES MADE BY M/S.KGPL TO THE ASSESSEE AS WELL AS TO OTHER INDEPENDENT ENTITIES WITHIN INDIA. THE ASSESSEE HAS ALSO PLACED ON RECORD DETAILS OF SALES MADE BY M/S.KGPL TO NON-ASSOCIATE COMPANIES OUTSIDE INDIA AS WELL AS TO ASSOCIATE COM PANIES. THESE DETAILS ARE AVAILABLE AT PAGE NOS.89,90, 91, 92 AND 93 OF THE PAPER BOOK. THESE DETAILS READ AS UNDER: KIRAN GEMS PVT. LTD. SUMMARY OF SALES F.Y.2008-09 KIRAN JEWELRY SR.NO. INVOICE NO. DATE CARAT INVOICE AMT. IN US$. CONVERSION RATE INVOICE AMT. IN INR RATE PER CARAT IN US$ RATE PER CARAT IN INR 1 3 15 - 04 - 08 1,392.04 9,78,356.85 39.85 3,89,87,520.47 702.82 28,007.47 2 3 30 - 04 - 08 1,670.68 10,10,084.98 39.85 4,02,51,886.46 604.60 24,093.12 3 1 15 - 05 - 08 299.94 1,83,674.25 39.90 73,28,602.58 612.37 24,433.56 4 3 31 - 05 - 08 2,102.01 14,47,841.75 39.90 5,77,68,885.83 688.79 27,482.69 5 3 15 - 06 - 08 1,917.26 11,90,677.65 42.50 5,06,03,800.13 621.03 26,393.81 6 5 30 - 06 - 08 3,206.20 18,41,187.60 42.50 7,82,50,473.01 574.26 24,405.99 7 3 15 - 07 - 08 1,552.25 9,01,438.35 42.70 3,84,91,417.55 580.73 24,797.18 8 3 31 - 07 - 08 1,913.86 13,63,967.90 42.70 5,82,41,429.34 712.68 30,431.39 9 1 15 - 08 - 08 1,191.64 7,22,843.55 41.95 3,03,23,286.92 606.60 25,446.68 ITA NO.2629/AHD/2014 (KIRAN JEWELLERY)-3 32 10 2 31 - 08 - 08 1,709.30 3,82,144.78 41.95 1,60,30,973.52 223.57 9,378.68 11 3 15 - 09 - 08 2,231.47 21,82,222.40 43.15 9,41,62,896.56 977.93 42,197.70 12 6 30 - 09 - 08 3,955.75 31,56,155.57 43.15 13,61,88,112.86 797.87 34,427.89 13 6 15 - 10 - 08 2,713.84 27,36,502.25 46.05 12,60,15,928.61 1,008.35 46,434.55 14 5 31 - 10 - 08 4,545.86 30,83,987.74 46.05 14,20,17,635.44 678.42 31,241.09 15 2 15 - 11 - 08 1,578.93 17,80,789.50 49.65 8,84,16,198.68 1,127.85 55,997.54 16 1 30 - 11 - 08 598.08 81,269.03 49.65 40,35,007.34 135.88 6,746.60 17 4 15 - 12 - 08 1,986.92 22,83,868.95 49.40 11,28,23,126.13 1,149.45 56,782.92 18 2 31 - 12 - 08 959.55 10,69,402.20 49.40 5,28,28,468.68 1,114.48 55,055.46 19 4 15 - 01 - 09 2,512.74 28,37,841.50 47.40 13,45,13,687.10 1,129.38 53,532.67 20 6 31 - 01 - 09 2,450.14 22,71,607.15 47.40 10,76,74,178.91 927.13 43,946.13 21 6 15 - 02 - 09 2,861.21 16,19,703.17 48.40 7,83,93,633.42 566.09 27,398.77 22 2 28 - 02 - 09 1,317.96 10,22,245.75 48.40 4,94,76,694.30 775.63 37,540.36 23 3 15 - 03 - 09 2,392.80 15,66,120.49 49.40 7,73,66,352.21 654.51 32,332.98 24 8 31 - 03 - 09 4,531.11 12,21,847.49 49.40 6,03,59,266.01 269.66 13,321.08 51,591.54 3,69,35,780.85 1,68,05,49,462.06 715.93 32,574.13 EXPORTS OF CUT & POLISHED DIAMONDS TO NON ASSOCIATE S COMPANIES SR. NO. INVOI CE NO. DATE CARAT INVOICE AMT. IN US$. CONVE RSION RATE INVOICE AMT. IN INR RATE PER CARAT IN US$ RATE PER CARAT IN INR 1 32 15-04-08 13,900.76 45,13,471.90 39.93 18,02,34,062.69 324.69 12,965.7 7 2 35 30 - 04 - 08 36,452.40 51,15,244.74 40.03 20,47,71,178.88 140.33 5,617.50 3 35 15 - 05 - 08 19,101.53 41,44,316.13 41.18 17,06,43,766.30 216.96 8,933.51 4 53 31 - 05 - 08 41,229.29 1,46,38,872.25 42.73 62,54,55,112.95 355.06 15,170.16 5 44 15 - 06 - 08 17,548.92 68,74,546.51 42.70 29,35,17,771.24 391.74 16,725.69 6 33 30 - 06 - 08 24,595.62 99,80,238.52 42.88 42,79,47,037.39 405.77 17,399.32 7 40 15 - 07 - 08 24,169.89 79,39,255.10 43.08 34,20,10,644.78 328.48 14,150.28 8 54 31 - 07 - 08 30,903.15 1,29,51,347.25 42.67 55,25,76,505.19 419.09 17,880.91 9 33 15 - 08 - 08 19,031.32 60,46,774.17 42.51 25,70,18,837.37 317.73 13,505.05 10 57 31 - 08 - 08 51,543.10 1,00,89,833.68 43.60 43,98,89,545.49 195.76 8,534.40 11 43 15 - 09 - 08 22,465.64 94,65,529.98 44.82 42,42,54,906.02 421.33 18,884.61 12 33 30 - 09 - 08 11,442.36 39,62,468.94 46.06 18,24,98,107.67 346.30 15,949.34 13 49 15 - 10 - 08 21,138.31 68,15,491.76 47.82 32,59,10,060.93 322.42 15,417.98 14 38 31 - 10 - 08 10,806.90 40,27,900.75 49.27 19,84,54,438.26 372.72 18,363.68 15 12 15 - 11 - 08 11,630.88 52,10,554.69 47.65 24,82,81,225.39 447.99 21,346.73 16 20 30 - 11 - 08 9,918.85 32,76,030.41 49.97 16,37,14,855.67 330.28 16,505.43 17 24 15 - 12 - 08 16,346.52 55,72,609.93 49.56 27,61,54,032.96 340.90 16,893.75 18 15 31 - 12 - 08 2,492.34 8,50,509.53 47.82 4,06,70,805.10 341.25 16,318.32 19 17 15 - 01 - 09 20,820.15 68,43,081.26 48.71 33,33,22,106.93 328.68 16,009.59 20 22 31 - 01 - 09 24,134.87 93,43,878.11 48.87 45,66,68,181.63 387.15 18,921.51 21 21 15 - 02 - 09 7,991.04 27,77,877.44 48.77 13,54,67,503.96 347.62 16,952.42 22 34 28 - 02 - 09 19,681.97 64,39,308.92 49.47 31,85,30,409.93 327.17 16,183.87 ITA NO.2629/AHD/2014 (KIRAN JEWELLERY)-3 33 23 28 15 - 03 - 09 15,739.89 57,29,697.83 51.61 29,57,29,458.76 364.02 18,788.53 24 49 31 - 03 - 09 23,579.04 77,85,548.85 50.66 39,43,94,229.71 330.19 16,726.48 4,96,664.74 16,03,94,388.65 7,28,81,14,785.20 322.94 14,674.11 DEEMED EXPORTS TO NON AE SR. NO. INVOICE NO. DATE CARAT INVOICE AMT. IN US$. CONVERS ION RATE INVOICE AMT. IN INR RATE PER CARAT IN US$ RATE PER CARAT IN INR 1 4 15 - 04 - 08 363.76 82,541.19 32,89,266.42 226.91 9,042.41 2 1 30 - 04 - 08 31.36 10,414.55 4,15,019.82 332.10 13,234.05 3 4 15 - 05 - 08 627.46 1,00,586.57 40,13,404.15 160.31 6,396.27 4 2 31 - 05 - 08 215.63 32,303.86 12,88,924.02 149.81 5,977.48 5 2 15 - 06 - 08 120.26 37,596.00 15,97,830.00 312.62 13,286.46 6 4 30 - 06 - 08 703.88 2,00,895.14 85,38,043.46 285.41 12,129.97 7 1 15 - 07 - 08 54.72 14,566.20 6,21,976.74 266.20 11,366.53 8 0 31 - 07 - 08 9 5 15 - 08 - 08 989.41 1,45,615.08 61,08,552.60 147.17 6,173.93 10 7 31 - 08 - 08 888.30 3,25,777.76 1,36,66,377.04 366.74 15,384.87 11 3 15 - 09 - 08 458.79 1,87,008.16 80,69,402.10 407.61 17,588.44 12 2 30 - 09 - 08 508.91 1,44,094.65 62,17,684.15 283.14 12,217.65 13 5 15 - 10 - 08 938.38 1,95,321.04 89,94,533.90 208.15 9,585.17 14 3 31 - 10 - 08 165.16 29,228.31 13,45,963.68 176.97 8,149.45 15 4 15 - 11 - 08 756.88 1,48,126.64 73,54,487.67 195.71 9,716.85 16 1 30 - 11 - 08 23.90 3,824.00 1,89,861.60 160.00 7,944.00 17 3 15 - 12 - 08 224.05 61,814.86 30,53,654.09 275.90 13,629.34 18 1 31 - 12 - 08 69.32 16,522.50 8,16,211.50 238.35 11,774.55 19 2 15 - 01 - 09 97.78 22,017.96 10,43,651.31 225.18 10,673.46 20 4 31 - 01 - 09 239.21 49,886.60 23,64,624.84 208.55 9,885.14 21 3 15 - 02 - 09 232.89 1,01,439.62 49,09,677.61 435.57 21,081.53 22 3 28 - 02 - 09 353.17 63,965.58 30,95,934.07 23 1 15 - 03 - 09 1,032.86 1,08,450.30 53,57,444.82 105.00 5,187.00 24 1 31 - 03 - 09 12.42 16,614.00 8,20,731.60 9,108.50 20,98,610.57 9,31,73,257.19 230.40 10,229.26 KIRAN GEMS PVT. LTD. F.Y. 2008-09 SUMMARY OF LOCAL SALES SR.NO. INVOICE NO. DATE CARAT INVOICE AMT. IN INR RATE PER CARAT IN INR 1 33 15 - APR - 08 6,648.90 10,75,19,630.66 16,171.04 2 30 30 - APR - 08 3,220.85 6,68,78,191.32 20,764.14 3 36 15 - MAY - 08 5,115.89 10,94,19,442.71 21,388.15 4 29 30 - MAY - 08 6,001.60 11,22,94,186.60 18,710.71 5 35 15 - JUN - 08 2,707.74 4,90,85,083.29 18,127.69 6 37 30 - JUN - 08 4,881.37 10,27,64,665.31 21,052.42 ITA NO.2629/AHD/2014 (KIRAN JEWELLERY)-3 34 7 43 15 - JUL - 08 7,744.49 16,64,06,489.83 21,487.08 8 40 31 - JUL - 08 6,495.58 12,68,81,930.90 19,533.58 9 26 15 - AUG - 08 2,761.62 5,23,49,451.03 18,956.07 10 25 30 - AUG - 08 3,930.41 8,96,25,569.94 22,803.11 11 44 15 - SEP - 08 4,394.00 8,37,21,766.99 19,053.66 12 30 30 - SEP - 08 7,433.53 13,95,98,841.10 18,779.62 13 23 15 - OCT - 08 6,483.64 12,90,03,401.82 19,896.76 14 29 30 - OCT - 08 2,767.16 5,72,29,809.49 20,681.79 15 11 15 - NOV - 08 896.64 1,83,23,048.44 20,435.23 16 14 30 - NOV - 08 1,009.18 2,15,31,791.79 21,335.93 17 28 15 - DEC - 08 5,786.66 11,42,60,395.82 19,745.48 18 26 31 - DEC - 08 2,726.32 6,15,13,144.96 22,562.70 19 12 15 - JAN - 09 598.74 1,79,85,557.09 30,039.01 20 23 31 - JAN - 09 2,085.72 3,59,68,738.30 17,245.24 21 21 15 - FEB - 09 1,276.44 2,13,99,038.01 16,764.63 22 24 28 - FEB - 09 2,370.74 4,58,65,557.62 19,346.52 23 16 15 - MAR - 09 1,450.40 2,56,12,835.24 17,659.15 24 27 31 - MAR - 09 1,246.84 2,29,70,640.40 18,423.09 90,034.46 1,77,82,09,208.66 40. ON THE STRENGTH OF THESE DETAILS, IT WAS CONTEN DED BY THE LD. COUNSEL FOR THE ASSESSEE THAT THE AVERAGE PRICE CHA RGED BY M/S.KGPL FROM THE ASSESSEE WAS MORE THAN THE ONE CHARGED FRO M OTHER INDEPENDENT PURCHASER. HE DREW OUR ATTENTION TOWAR DS PAGE NOS.47 & 49 OF THE LD.CIT(A)S ORDER AND CONTENDED THAT THE LD.FIRST APPELLATE AUTHORITY HAS ALSO MADE AN ANALYSIS OF THESE DETAIL S, BUT HAS ERRED IN APPRECIATING FACTS. HE POINTED OUT THAT WHILE TAKI NG COGNIZANCE OF THE FORTNIGHT SUMMARY SUBMITTED BY THE ASSESSEE, THE LD .CIT(A) HAS TAKEN LOWEST AVERAGE RATE OF DIAMOND SOLD TO THE ASSESSEE BY M/S.KGPL AND OBSERVED THAT IT IS MUCH LOWER THAN THE LOWEST AVER AGE RATE OF DIAMONDS SOLD BY M/S.KGPL TO ASSOCIATE CONCERN OUTS IDE INDIA, EXCEPT IN THE CASE OF KIRAN JEWELLERY LLC. THE LEARNED CO UNSEL FOR THE ASSESSEE POINTED OUT THAT THE LD.FIRST APPELLATE AUTHORITY O UGHT TO HAVE COMPARED THE RATES OF ONE COMMON FORTNIGHT. THE RATES CANN OT BE PICKED UP AS LOWEST, THROUGHOUT THE YEAR. SIMILARLY, THE LD.CIT (A) HAS COMPARED THE RATES OF THE ASSESSEE VIS--VIS EXPORTS MADE BY THE M/S.KGPL. THE RATES OUGHT TO BE COMPARED FROM LOCAL SALES OF M/S. KGPL. IF THE RATES ITA NO.2629/AHD/2014 (KIRAN JEWELLERY)-3 35 OF EXPORTS ARE TO BE COMPARED, THEN, SUCH RATES OUG HT TO BE COMPARED FROM OTHER EXPORTS OF THE M/S.KGPL. 41. THE LD.DR, ON THE OTHER HAND, RELIED UPON THE O RDER OF THE LD.CIT(A) AND SUBMITTED THAT THE LD.FIRST APPELLATE AUTHORITY HAS MADE AN ANALYSIS OF THE FINANCIAL DATA, AND THEREAFTER, OBSERVED THAT THE DIAMONDS SOLD BY M/S.KGPL TO THE ASSESSEE ARE SIGNI FICANTLY DIFFERENT FROM THE DIAMONDS SOLD TO OTHERS, BOTH AE AND NON-A E CONCERNS. THEREFORE, THE RATES CANNOT BE COMPARED. 42. ON DUE CONSIDERATION OF THE FACTS AND CIRCUMSTA NCES OF THE CASE ON THIS ISSUE, WE FIND THAT STAND OF THE ASSESSEE B EFORE THE AO FROM THE VERY BEGINNING WAS THAT NO TWO DIAMONDS ARE EXACTLY COMPARABLE. EVEN TWO PROFESSIONAL VALUERS WOULD PUT TWO DIFFERE NT VALUES FOR SAME SET OF DIAMONDS. THE VALUE OF THE DIAMOND IS IN TH E EYES OF BEHOLDER AND THE VALUE SUBSTANTIALLY VARIES FROM BUYER TO BU YER. IT WAS ALSO SUBMITTED THAT DESCRIPTION 4C REFERRED BY THE AO SO PROPERLY QUOTED FOR THE DIAMOND ONLY, CAPTURING THE PRODUCT CATEGOR Y/QUALITATIVE FEATURES. THE RATES OF DIAMONDS VARY SUBSTANTIALLY , EVEN UPTO 30%. IN SUPPORT OF THIS CONTENTION, THE ASSESSEE HAD MADE R EFERENCE OF A PRINT OUT FROM RAPPORT WEBSITE WHICH IS WORLDS LARGEST W EBSITE, SELLING DIAMONDS ON LINE. IN THIS REPORT, WEBSITE HAS LIST ED EXACTLY FOUR DIAMONDS OF SAME DESCRIPTION (4C) AND QUOTED FOUR D IFFERENT RATES WHICH VARY SUBSTANTIALLY. COPY OF THIS REPORT IS A VAILABLE AT PAGE NO.25 OF THE PAPER BOOK. WE HAVE PERUSED THIS REPORT. 43. WE ALSO FIND THAT THE ASSESSEE HAS CONTENDED BE FORE THE LD.FIRST APPELLATE AUTHORITY THAT M/S.KGPL HAS BEEN SUBJECT TO SCRUTINY ASSESSMENT SINCE LAST SEVERAL YEARS. IT HAS ALSO B EEN SUBJECTED TO TRANSFER PRICING AUDIT FOR THE ASSTT.YAR 2010-11. THE AO NEITHER MADE ANY ADDITION TO THE INCOME OF THE M/S.KGPL NOR TPO HAS RECOMMENDED ANY ADJUSTMENT IN THE ARMS LENGTH PRICE (ALP). IN THE TRANSFER PRICING STUDY REPORT, THE ASSESSEE HAS SUPPORTED ITS ALP OF ITS INTERNATIONAL ITA NO.2629/AHD/2014 (KIRAN JEWELLERY)-3 36 TRANSACTIONS WITH MARGIN EARNED BY COMPARABLE ENTIT IES. THE ASSESSEE HAS APPLIED TNMM METHOD, WHILE CARRYING OUT SUCH EX ERCISE, THE MARGIN EARNED BY THE M/S.KGPL WERE TAKEN AT ENTITY LEVEL, AS AGAINST MARGIN EARNED BY IT FROM SEGMENTAL SALES MADE TO INTERNATI ONAL AE. IN OTHER WORDS, THE MARGINS WERE NOT COMPARABLE QUA THE SALES MADE BY THE ASSESSEE TO ITS AE OUTSIDE INDIA ON THAT SEGMENT ON LY. RATHER, THE MARGIN OF M/S.KGPL AS ENTITY WAS CONSIDERED, THE EN TITY LEVEL MARGIN WERE USED SIMPLY BECAUSE, IT IS IMPOSSIBLE TO WORK OUT THE MARGIN QUA THE SPECIFIC SALES DUE TO THE REASON THAT IT IS PRA CTICALLY IMPOSSIBLE TO EXACTLY COMPARE TWO DIAMONDS. THIS METHOD HAS BEEN ACCEPTED BY THE TPO WHILE DETERMINING THE ALP OF INTERNATIONAL TRAN SACTIONS OF M/S.KGPL WITH ITS AE. WHEN SIMILAR EXERCISE QUA LOCAL SALES WAS TAKEN INTO CONSIDERATION, THE AO HAS EMPHASIZED THAT M/S.KGPL OUGHT TO HAVE PREPARED SEPARATE RESULTS EXHIBITING THE GP EARNED ON SALES MADE TO THE ASSESSEE AS WELL AS MADE TO INDEPENDENT BUYERS. THE M/S.KGPL HAS SHOWN ITS INABILITY TO SEGREGATE ITS ACCOUNT IN SUCH A MANNER. IN OUR OPINION, ONCE THE DEPARTMENT HAS ACCEPTED THE M ETHOD OF ACCOUNTANCY AS WELL AS TP STUDY REPORT OF M/S.KGPL, WHILE SCRUTINIZING THE REPORT OF M/S.KGPL, THEN IT IS NOT JUSTIFIABLE TO DRAW ADVERSE INFERENCE WHILE SCRUTINIZING CASE OF THE PRESENT AS SESSEE. IT IS ALSO PERTINENT TO MENTION HERE THAT IT IS FOR THE AO TO COLLECT THE MATERIAL, AND THEN PUT TO THE ASSESSEE TO POINT OUT DEFECTS I N THE METHODOLOGY OF THE ASSESSEE. THE AO HAS NOT MADE SUCH EFFORT. HE FRAMED THE ASSESSMENT UNDER AN ASSUMPTION THAT IT IS FOR THE A SSESSEE TO JUSTIFY ITS PROFIT RATE. HE ALSO CONSIDERED, AS M/S.KGPL HAS D UTY BOUND TO JUSTIFY THE PROFIT RATIO OF THE ASSESSEE, WHEREAS, NO SUCH REQUIREMENT IS UNDER THE LAW. 44. A BARE PERUSAL OF THE COMPARATIVE RATES COMPILE D IN THE ABOVE TABULAR FORM WOULD INDICATE THAT THE AVERAGE PRICE CHARGED BY THE M/S.KGPL FROM THE ASSESSEE WAS HIGHER THAN THE SALE S MADE TO OTHER CONCERNS. THE LD.FIRST APPELLATE AUTHORITY HAS REJ ECTED THIS COMPARISON ITA NO.2629/AHD/2014 (KIRAN JEWELLERY)-3 37 FOR THE REASON THAT THE M/S.KGPL HAS CUT AND POLISH ED DIAMONDS ACCORDING TO THE REQUIREMENT OF THE ASSESSEE. IN O THER WORDS, THE DIAMONDS SUPPLIED TO THE ASSESSEE WERE TAILOR-MADE, WHICH CAN EASILY BE USED FOR MANUFACTURING THE DIAMOND JEWELLERY UND ER THE UNITY CONCEPT OF DESIGN WHICH IS AN INVENTION OF THE ASSE SSEE. THE LD.CIT(A), IN ORDER TO BUTTRESS HIS CONCLUSION FOR THIS INFERE NCE, HAS MADE ANALYSIS OF LABOUR COST INCURRED BY M/S.KGPL. HE MADE COMPA RISON OF THE WAGES/ LABOUR CHARGES DEBITED BY M/S.KGPL VIS--VIS THAT OF THE ASSESSEE, AND THEN INFERRED THAT SINCE M/S.KGPL HAS INCURRED MORE EXPENSES ON LABOUR AND WAGES, IT MEANS THEY HAVE CU T AND POLISHED THE DIAMONDS ACCORDING TO PARTICULAR SPECIFICATION OF T HE ASSESSEE. BUT THE LD.FIRST APPELLATE AUTHORITY HAS LOST SIGHT ABOUT S UCH COMPARISON WITH REGARD TO THE INDEPENDENT PURCHASERS. THE ASSESSEE AND M/S.KGPL ARE IN TWO DIFFERENT LINE OF PRODUCTION. THEY ARE TOTA LLY ON DIFFERENT STATUS, AS HIGHLIGHTED IN THE REPORT OF INTERNATIONAL MONET ARY FUND (WORLD ECONOMIC OUTLOOK DATA BASIS) APRIL, 2013. HAD THE LD.FIRST APPELLATE AUTHORITY MADE COMPARISON OF LABOUR CHARGES INCURRE D BY M/S.KGPL, QUA THE DIAMOND SOLD TO OTHER SOURCES AND WORKED OUT T HAT ON THOSE SALES EXPENSES WERE LESSER, WHEREAS THE LABOUR CHAR GES ON THE DIAMOND SOLD TO THE ASSESSEE ARE HIGHER, THEN ONE CAN UNDER STAND THE LOGIC OF COMPARISON. THE LD.FIRST APPELLATE AUTHORITY HAS M ADE COMPARISON OF A CONCERN WHICH IS ENGAGED IN THE BUSINESS OF CUT AND POLISHED DIAMONDS, WITH THE CONCERN, WHICH IS ENGAGED IN INNOVATIVE UN ITY CONCEPT DESIGN AND MANUFACTURING. BOTH THESE ARE QUITE DIFFERENT AND THEY ARE NOT COMPARABLE. 45. THE LD.COUNSEL FOR THE ASSESSEE FURTHER POINTED OUT THE APPROACH OF THE AO. HE SUBMITTED THAT IN ASSTT.YEAR 2008-09 , THOUGH THE BUSINESS WAS FOR A LIMITED PERIOD OF FOUR MONTHS, B UT THE ASSESSEE HAS DISCLOSED PROFIT RATE AT 20.80% OF THE TURNOVER. T HE ASSESSMENT WAS MADE UNDER SECTION 143(3). THE LD.AO HAS ACCEPTED THE PROFIT MARGIN SHOWN BY THE ASSESSEE. THE AO HAS NOWHERE OBSERVED THAT THE ITA NO.2629/AHD/2014 (KIRAN JEWELLERY)-3 38 BUSINESS AFFAIRS OF THE ASSESSEE HAS BEEN ARRANGED IN SUCH MANNER WHICH HAS GIVEN RISE TO EXTRAORDINARY PROFIT TO THE ASSESSEE. IN THE ASSTT.YEAR 2009-10, THE ASSESSEE HAS DISCLOSED PROF IT MARGIN AT 23.67%. THE LD.AO HAS SCALED DOWN IT TO 20.67%. M EANING THEREBY, THE PROFIT MARGIN IN THE OPINION OF THE AO WAS REAS ONABLY UPTO 20.80%. IN THE NEXT ASSESSMENT YEAR, WHEN THE ASSESSEE HAS DISCLOSED THE PROFIT MARGIN AT 20.63%, THEN THE AO HAS SCALED DOWN TO 11 .45% WITHOUT ANY JUSTIFICATION. HE FURTHER DREW OUR ATTENTION TOWAR DS SUBMISSIONS BY THE ASSESSEE MADE BEFORE THE LD.FIRST APPELLATE AUTHORI TY, AS CONTAINED IN PARA. 2.4.4 AND PLACED AT PAGE NO.9 OF THE PAPER BO OK. HE CONTENDED THAT GUNJAN EXPORTS IS ALSO ENGAGED IN DIAMOND MANU FACTURING AS WELL AS JEWELLERY MANUFACTURE. THIS CONCERN HAS EARNED A MARGIN OF 19.96% FOR THE SAME YEAR, AND IS BEING ASSESSED IN THE SAM E RANGE. THE LD.AO HAS ACCEPTED THE PROFITS SHOWN BY THE GUNJAN EXPORT S AS AN ORDINARY PROFIT. THERE IS NO BASIS FOR DESIGNATING THE MARG IN EARNED BY THE ASSESSEE AS EXTRA-ORDINARY PROFIT. 46. WE HAVE ANALYZED THIS ASPECT, AND WE DO NOT FIN D THE REASONS IN THE ORDER OF THE CIT(A) AS WELL AS OF THE AO FOR RE JECTING THIS ARGUMENT. THE LD. AUTHORITIES HAVE SIMPLY IGNORED THESE SUBMI SSIONS OF THE ASSESSEE WITHOUT SPECIFICALLY DEALING THEM. THE AS SESSEE HAS ALSO POINTED OUT THAT ASSESSEE HAS MADE PURCHASES OF 15% FROM UN-RELATED PARTIES IN ASSTT.YEAR 2010-11. IT HAS SUBMITTED DE TAILS OF PURCHASES AND THEIR SALE FIGURE. THERE IS NO VARIATION OF PR OFIT EARNED FROM THEM. THESE DETAILS WERE SOUGHT TO BE PRODUCED BY ADDITIO NAL EVIDENCE, BUT NOT DEALT WITH BY THE CIT(A) SPECIFICALLY. THE LD. COUNSEL FOR THE ASSESSEE FURTHER CONTENDED THAT THE ASSESSEE HAS BE EN IN A VERY PIQUANT SITUATION. IF IT EARNED LOWER MARGIN, THE N THERE WILL BE AN ADJUSTMENT IN THE ALP OF INTERNATIONAL TRANSACTION. THE ADDITION MADE ON ACCOUNT OF ALP ADJUSTMENT WOULD NOT QUALIFY FOR DEDUCTION UNDER SECTION 10AA ON ACCOUNT OF SPECIFIC BAR UNDER SECTI ON 92CA(4)(PROVISO). THE ASSESSEE WILL HAVE TO PAY TAXES ON THAT ADJUSTE D ALP. IN CASE THE ITA NO.2629/AHD/2014 (KIRAN JEWELLERY)-3 39 ASSESSEE HAS SHOWN HIGHER PROFIT, THEN IT IS TO BE TERMED AS EXTRAORDINARY PROFIT, RESULTING DENIAL OF EXEMPTION UNDER SECTION 10AA AND PAYMENT OF TAXES. 47. THE LEARNED DR TOOK US THROUGH THE ORDER OF THE LD.CIT(A). ON PERUSAL OF THE ORDER OF THE CIT(A), WE FIND THAT TH E LD.FIRST APPELLATE AUTHORITY HAS MADE ANALYSIS OF FINANCIAL DATA OF M/ S.KGPL, ASSESSEE AND ULTIMATE PURCHASER FROM THE ASSESSEE. ON AN ANALYS IS OF THE CAPITAL CONTRIBUTION BY THE PARTNERS, TOTAL INVESTMENT, GP DECLARED BY THESE CONCERNS, THE LD.FIRST APPELLATE AUTHORITY ARRIVED AT A CONCLUSION THAT GP MARGIN OF THE ASSESSEE IS HIGHER THAN BOTH THE CONC ERNS, WHO ARE IN THE CHAIN I.E. SUPPLYING RAW-MATERIAL TO THE ASSESSEE A ND PURCHASING FINISHED PRODUCTS. IN OUR OPINION, THE LD.FIRST AP PELLATE AUTHORITY WAS NOT REQUIRED TO MAKE TP ADJUSTMENT ON DOMESTIC TRAN SACTION UNDER THE GARB OF SECTION 80IB(10). THE LD.CIT(A) OUGHT TO H AVE PIN-POINTED A PECULIAR CIRCUMSTANCE, INDICATING THAT THIS CIRCUMS TANCE SHOWS THAT COURSE OF BUSINESS HAS BEEN ARRANGED IN SUCH A MANN ER WHICH HAS GIVEN RISE TO EXTRAORDINARY PROFIT TO THE ASSESSEE. THE SUPPLIER OF THE ASSESSEE VIS--VIS PURCHASER OF THE ASSESSEE, BOTH ARE NOT IN THE SAME LINE OF BUSINESS, AND RESULTS ARE NOT COMPARABLE WI TH THE ASSESSEE. THE REFERENCE TO THE COMPARABLE CASES IN THE T.P. STUDY REPORT ARE CONCERNED, THE ASSESSEE HAS FILED SPECIFIC OBJECTIO N ON THOSE COMPARABLE IN THE ASSESSMENT PROCEEDINGS FOR THE AS STT.YEAR 2009-10. WE HAVE EXTRACTED THOSE OBJECTIONS WHILE TAKING COG NIZANCE OF THE ASSESSEES REPLY. REVENUE AUTHORITIES HAVE FAILED TO RECORD ANY FINDING AS TO HOW THESE CASES ARE COMPARABLE. SIMILARLY, T HE ASSESSEE HAS GIVEN COMPARABLE CASES WHERE THE GP WAS SHOWN UPTO 24% (BEFORE DEPRECIATION AND INTEREST). THE AO HAS NOT REJECTE D THESE COMPARABLE BY RECORDING ANY FINDING. ON AN ANALYSIS OF THE IM PUGNED ORDERS IN BOTH THE YEARS, WE GATHER AN IMPRESSION THAT IDEA O F THE AO WAS TO REDUCE THE PROFIT MARGIN OF THE ASSESSEE BY ADOPTIN G ANY METHOD, IN ORDER TO DENY EXEMPTION, WHICH HAS BEEN OTHERWISE A DMISSIBLE TO THE ITA NO.2629/AHD/2014 (KIRAN JEWELLERY)-3 40 ASSESSEE, BY VIRTUE OF PROVISIONS OF THE ACT. THE ACTION AT THE END OF BOTH THE AUTHORITIES IS NOT JUSTIFIABLE. 48. THE FACTS AND CIRCUMSTANCES, IN ASSTT.YEAR 2010 -11 ARE ALSO SIMILAR. THERE IS NO DISPARITY. NEITHER THE AO PO INTED OUT ANY SPECIFIC MATERIAL NOR THE CIT(A) HAS POINTED OUT ANY DISPARI TY WHICH CAN INFLUENCE THE DECISION MAKING PROCESS IN THE ASSTT. YEAR 2010-11. WE, THEREFORE, ALLOW THE APPEALS OF THE ASSESSEE AND DE LETE THE DOWNWARD ADJUSTMENT MADE BY THE AO IN BOTH THE ASSESSMENT YE ARS. CONSEQUENTLY, APPEAL OF THE REVENUE IS DISMISSED. 49. IN THE RESULT, THE APPEALS OF THE ASSESSEE ARE ALLOWED AND THAT OF THE REVENUE IS DISMISSED. ORDER PRONOUNCED IN THE COURT ON 11 TH SEPTEMBER, 2015 AT AHMEDABAD. SD/- SD/- (ANIL CHATURVEDI) ACCOUNTANT MEMBER (RAJPAL YADAV) JUDICIAL MEMBER
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