M/S. SANGHAVI JEWELLERY MFG. CO. PVT. LTD, MUMBAI V. THE ITO 8(3)(1), MUMBAI

ITA 352/MUM/2008

• Counselvise Citation: 35219914 RSA 2008
• Duration Of Justice: 3 year(s) 10 month(s) 14 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-11-2011
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: J
• Next Hearing Date: 11-07-2016
• Assessment Year: 2004-2005
• Appeal Filed On: 16-01-2008
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: KUSUM INGALE
• Assessee Lawyers: B V JHAVERI
• Keywords: Business income; Depreciation; Transfer pricing; International transaction
• Section: 43B; 80HHC; 131; 10

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH A : MUMBAI BEFORE SHRI R.S. PADVEKAR, ( JUDICIAL MEMBER) AND SHRI RAJENDRA SINGH,(ACCOUNTANT MEMBER) ITA NO.352/MUM/2008 ASSESSMENT YEAR : 2004-05 M/S. SANGHVI JEWELLERY MFG. CO. PVT. LTD. G-41, GEM & JEWELLERY COMPLEX-III SEEPZ, SEZ, ANDHERI(E) MUMBAI-400 096. ..( APPELLANT ) P.A. NO. (AAACS 7836 B) VS. INCOME TAX OFFICER WARD-8(3)(1) ROOM NO.201, AAYAKAR BHAVAN M.K. ROAD, CHURCHGATE MUMBAI-400 020. ..( RESPONDENT ) ITA NO.577/MUM/2008 ASSESSMENT YEAR : 2004-05 INCOME TAX OFFICER MUMBAI-400 020. ..( APPELLANT ) VS. M/S. SANGHVI JEWELLERY MFG. CO. PVT. LTD. MUMBAI-400 096. ..( RESPONDENT ) ASSESSEE BY : SHRI B.V. JHAVERI DEPARTMENT BY : MS. KUS UM INGALE DATE OF HEARING : 13.10.2011 DATE OF PRONOUNCEMENT : 30 TH NOVEMBER, 2011 O R D E R PER RAJENDRA SINGH (AM). THESE CROSS APPEALS ARE DIRECTED AGAINST ORDER DATED 16.1 1.2007 OF CIT(A) FOR THE ASSESSMENT YEAR 2004-05. THESE APPEA LS WHICH ALSO ITA NO.352 & 577/M/08 A.Y:04-05 2 INVOLVE SOME COMMON ISSUES WERE HEARD TOGETHER AND ARE T HEREFORE BEING DISPOSED OF BY A SINGLE CONSOLIDATED ORDER FOR T HE SAKE OF CONVENIENCE. THE ASSESSEE HAS RAISED DISPUTES ON FOUR DIFFER ENT GROUNDS WHEREAS THE DISPUTE RAISED BY THE REVENUE ARE O N TWO GROUNDS. THE MAJOR ISSUE IS REGARDING ADJUSTMENT MADE BY AO UNDER SECTION 10A(7) R.W.S. 80IA(10) ON WHICH BOTH THE PARTIE S ARE ON APPEAL. THE GROUNDS RAISED BY THE ASSESSEE AS WELL AS REV ENUE ARE REPRODUCED BELOW AS READY REFERENCE. 2. THE GROUNDS RAISED IN ASSESSEES APPEAL ARE AS UNDER :- (I) THE CIT(A) ERRED IN CONFIRMING THE ACTION OF A O OF NOT INCREASING /ADJUSTING THE PROFIT OF BUSINESS BY THE DISALLOWABLE EXPENDITURE UNDER SECTION 43B AND/OR S ECTION 40A(7) AND /OR SECTION 3791) OF THE ACT. (II) THE CIT(A) ERRED IN UPHOLDING THE ACTION OF A O REDUCING THE REWINDING CHARGES FROM THE PROFIT OF B USINESS FOR THE PURPOSE OF COMPUTING THE EXEMPTION UNDER SECTIO N 10A OF THE ACT. (III) THE CIT(A) ERRED IN UPHOLDING THAT THE INTERE ST ON DEPOSIT KEPT FOR THE BUSINESS PURPOSE IS INCOME FRO M OTHER SOURCES. HE HAS, FURTHER, ERRED IN NOT ALLOWING THE NETTING OFF OF INTEREST EARNED AGAINST THE INTEREST PAID. (IV) THE CIT(A) ERRED IN UPHOLDING DISALLOWANCE OF THE RELIEF CLAIMED UNDER SECTION 10A OF THE INCOME TAX ACT, 1961 BY APPLYING SECTION 10A(7) READ WITH SECTION 80IA(10) OF THE ACT TO THE EXTENT OF RS.61,72,623/-, CONSISTING OF : A. AN AMOUNT OF RS.41,72,623/-, ALLEGEDLY ATTRIBUTA BLE TO PURCHASES FROM A RELATED PARTY, ALTHOUGH, THERE WAS NO FINDING THAT THE INCREASE IN GROSS PROFIT IS ATTRIB UTABLE TO THE TRANSACTIONS (PURCHASES) WITH RELATED PARTY; AND B. AN AMOUNT OF RS.20,00,000/- ALLEGEDLY ON ACCOUNT OF FALL IN LABOUR CHARGES, ALTHOUGH, THERE IS NO TR ANSACTION OR ITA NO.352 & 577/M/08 A.Y:04-05 3 THERE IS NO FINDING THAT THERE WAS A TRANSACTION WI TH A RELATED PARTY OR SUPPRESSION OF LABOUR CHARGES. 2.1 THE GROUNDS RAISED IN THE APPEAL BY THE DEPARTME NT ARE AS UNDER :- (I) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE C ASE AND IN LAW, THE LD. CIT(A) ERRED IN DELETING THE DI SALLOWANCE IN RESPECT OF DELAYED PAYMENT OF PF/ESIC OF RS.85,447/ - WHILE COMPUTING DEDUCTION UNDER SECTION 10A. (II) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE C ASE AND IN LAW, THE LD. CIT(A) ERRED IN DELETING THE AD JUSTMENT MADE BY THE AO UNDER SECTION 80IA(10) R.W.S. 10A(7) IN R ESPECT OF UNDER REPORTING OF PURCHASES/LABOUR CHARGES FROM RE LATED PARTIES. 3. FIRST WE TAKE UP THE DISPUTE REGARDING ADJUSTMENT M ADE BY AO UNDER SECTION 10A(7) R.W.S. 80I(10) ON WHICH BOTH THE P ARTIES ARE IN APPEAL. BRIEFLY STATED, FACTS OF THE CASE ARE THAT THE ASSESSEE WHO WAS ENGAGED IN THE BUSINESS OF MANUFACTURING AND EXPORT OF DIAMONDS STUDDED GOLD JEWELLERY, HAD DECLARED NIL INCOME FOR TH E ASSESSMENT YEAR 2004-05 AFTER CLAIMING DEDUCTION UNDER SECTION 10 A. THE ASSESSEE WAS ENTITLED TO DEDUCTION UNDER SECTION 10A AND THIS WAS THE LAST YEAR FOR CLAIMING DEDUCTION UNDER THE SAID SECTION. THE AO NOTED THAT THERE WAS ABNORMAL INCREASE IN GP RATE DECLARED BY THE ASSESSEE WHICH WAS 16.80% THIS YEAR COMPARED TO 9.93% IN THE IMM EDIATE PRECEDING YEAR I.E. ASSESSMENT YEAR 2003-04 AND 10.89% I N ASSESSMENT YEAR 2002-03. THE AO ALSO NOTED THAT THERE W AS ABNORMAL DECLINE IN AVERAGE PURCHASE PRICE PER CARAT OF DIAMOND FROM ITA NO.352 & 577/M/08 A.Y:04-05 4 RS.5,276/- PER CARAT IN THE IMMEDIATE ASSESSMENT YEAR TO RS.4,193 IN THIS YEAR. THE AO FURTHER NOTED THAT PURCHASE OF DIAM ONDS FROM THE GROUP CONCERN M/S. SANGHVI EXPORTS IN THIS YEAR HAD INCRE ASED BY 10 TIMES I.E. FROM 5% OF TOTAL PURCHASE IN THE IMMEDIATE PRECEDING YEAR TO MORE THAN 50% IN THIS YEAR. ALL THE DIRECTORS OF T HE ASSESSEE COMPANY WERE PARTNERS IN M/S. SANGHVI EXPORTS WHICH ALSO HELD 52.63% IN THE ASSESSEE COMPANY. THE PURCHASE OF DIAMONDS B Y THE ASSESSEE FROM M/S. SANGHVI EXPORTS THIS YEAR WAS 19.96 CROR ES OUT OF TOTAL PURCHASE OF ABOUT RS.38.55 CRORES. THE AO OBSERVED THAT M/S. SANGHVI EXPORTS WAS IN THE DIAMOND TRADING BUSINESS FOR A LONG TIME AND WAS ALSO A DTC SIGHTHOLDER BUT THE ASSESSEE HAD NOT M ADE MUCH PURCHASES FROM THE SAID CONCERN IN THE EARLIER YEARS. IN THE EARLIER YEARS, MOST OF THE PURCHASES WERE FROM M/S. DHAVAL EXPOR TS AND M/S. SUPER DIAM. THOUGH THESE TWO CONCERNS CONTINUED TO DO B USINESS IN FINISHED DIAMONDS, THESE WERE SUBSTITUTED BY M/S. SANGH VI EXPORTS DURING THIS YEAR FROM WHICH MORE THAN 50% PURCHASES WERE MADE. THE AO NOTED THAT AVERAGE RATE OF PURCHASE PER CARAT F ROM M/S. SANGHVI EXPORTS WAS AT RS.3,445/- COMPARED TO OVER ALL AVERAGE PURCHASE PRICE OF RS.4,193/- THIS YEAR. 3.1 THE AO THEREFORE PROCEEDED TO EXAMINE THE MATTER IN DETAIL. HE ASKED THE ASSESSEE TO PRODUCE THE FOLLOWING DETAILS:- ITA NO.352 & 577/M/08 A.Y:04-05 5 I) COST OF DIAMONDS OF RS.19,96,51,322/- IN THE HANDS OF M/S. SANGHVI EXPORTS. II) COPY OF BILLS AND PACKING LIST OF PURCHASE FROM M/S . SANGHVI EXPORTS. III) RETURN OF INCOME, BALANCE SHEET AND PROFIT & LOSS A CCOUNT OF M/S. SANGHVI EXPORTS FOR THE ASSESSMENT YEAR 2004-0 5. IV) PIECEWISE DETAILS OF DIAMONDS (A) OPENING STOCK (B) PURCHASE/IMPORT INVOICE WISE (C) UTILIZATION OF DIA MONDS (D) CLOSING STOCK V) IT IS SEEN THAT LABOUR CHARGES OF RS.72 LACS PAID F OR CONSUMPTION OF RAW MATERIAL OF RS.66.10 CRORES IN FY 2002-03 WH ILE RS.15 LACS WAS PAID FOR CONSUMPTION OF RAW MATERIAL OF RS .55.11 CRORES (IN FY 2003-04). VI) NAME, ADDRESS, QUALIFICATION AND SALARY OF EMPLOYEE S 3.2 THE ASSESSEE, HOWEVER, DID NOT FILE ANY DETAILS IN RELAT ION TO COST OF DIAMONDS PURCHASED IN CASE OF M/S. SANGHVI EXPORTS, COP Y OF BILLS AND PACKING LIST OF PURCHASE FROM M/S. SANGHVI EXPORTS , THE PIECEWISE DETAILS OF DIAMONDS IN OPENING STOCK, PURCHASES, UTILIZATI ON AND CLOSING STOCK. THE AO, THEREFORE, EXAMINED THE GENERAL MANAG ER (GM) SHRI CHITRANJAN MAHADADALKAR OF THE COMPANY UNDER SECTION 1 31 OF THE INCOME TAX ACT. HE ASKED HIM TO GIVE REASONS FOR SUBSTANTI AL INCREASE IN GP RATE BUT HE COULD NOT PINPOINT ANY SPECIFIC REA SONS. HE ALSO COULD NOT GIVE THE REASON FOR SUBSTITUTING M/S. SANGHVI EXPORTS IN PLACE OF NON RELATED PARTIES IN THE ANSWER TO Q.NO.15. THE GM IN RESPONSE TO Q.NO.23 REPLIED THAT THE ASSESSEE WAS NOT MAIN TAINING PIECEWISE RECORD OF DIAMONDS. IN REGARD TO DRASTIC FALL IN AVERAGE ITA NO.352 & 577/M/08 A.Y:04-05 6 PURCHASE PRICE OF POLISHED DIAMONDS, THE GM IN RESPONSE TO Q.NO.19 STATED THAT IT COULD BE DUE TO GENERAL FALL IN PRICE O F DIAMONDS OR CHANGE OF QUALITY OF DIAMONDS USED. FURTHER THE GM IN RESPONSE TO Q.NO.26 STATED THAT THE ASSESSEE WAS MAINTAINING REFERENCE NUMBERS FOR IDENTIFICATION OF DIAMONDS. THE AO OBSERVED THAT THE ASSESSEE DID NOT PRODUCE REFERENCE NUMBERS DURING ASSESSMENT PROCEEDING S. IT WAS ALSO OBSERVED BY HIM THAT THE REPLY OF THE GM THA T FALL IN AVERAGE PURCHASE PRICE WAS DUE TO FALL IN PRICES OF DIAMONDS OR QU ALITY OF DIAMONDS WAS NOT SATISFACTORY AS HAD IT BEEN SO, THE PRICES OF JEWELLERY HAD ALSO FALLEN AND OVER ALL GP WOULD HAVE REMAINED THE SAME. THE AO ALSO NOTED THAT AVERAGE SALE RATE PER CAR AT IN CASE OF M/S. SANGHVI EXPORTS IN THE RELEVANT YEAR WAS RS .7,310/- AS PER DETAILS IN THE AUDIT REPORT OF THAT CONCERN. BUT THE AVERAGE RATE FOR SUPPLY MADE TO THE ASSESSEE COMPANY WAS RS.3,445/-. THE AO , THEREFORE, ASKED THE ASSESSEE TO EXPLAIN AS TO WHY PROVISI ONS OF SECTION 10A(7) R.W.S. 80IA(10) SHOULD NOT BE APPLIED AN D ADJUSTMENT BE MADE ON ACCOUNT OF PURCHASES FROM THE GROUP CONCERN. 3.3 THE ASSESSEE SUBMITTED THAT THE INCREASE IN GP RATE WAS BECAUSE OF PURCHASE OF LOWER QUALITY DIAMOND WHICH RESULT ED IN MUCH LOWER AVERAGE PURCHASE PRICE. IT WAS ALSO SUBMITTED THA T THE ASSESSEE WAS OPERATING FROM SEEPZ IN WHICH EACH AND EVERY IMPO RT AND EXPORT ITA NO.352 & 577/M/08 A.Y:04-05 7 HAD TO BE SUBMITTED TO CUSTOMS DEPARTMENT WHO HAD NOT F OUND ANY DISCREPANCY. IT WAS ALSO SUBMITTED THAT TRANSFER PRICING P ROVISIONS OF CHAPTER-X OF INCOME TAX ACT WERE APPLICABLE IN THE CASE OF ASSESSEE AND NO TRANSFER PRICING ADJUSTMENTS HAD BEEN MADE WHICH SHOWS THAT THE PURCHASES HAD BEEN MADE AT ARMS LENGTH. THE AO, HO WEVER, OBSERVED THAT CUSTOMS AUTHORITIES WERE MAINLY CONCERNED WITH ADDITION TO EXPORTS AND DO NOT MAKE ANY CHECKS FROM I NCOME TAX ANGLE. FURTHER, GM IN RESPONSE TO Q.NO.24 HAD STATED THAT CUSTOMS AUTHORITIES ACCEPTED THE PURCHASES AND SALES INVOICE AT FACE VALUE AND NO SPECIAL SCRUTINY WAS DONE DURING THE YEAR. AS REGARDS T RANSFER PRICING ADJUSTMENT, THE AO OBSERVED THAT THESE WERE APP LICABLE TO INTERNATIONAL TRANSACTIONS WITH NON-RESIDENT ASSOCIATE ENT ERPRISES AND, THEREFORE, MERELY BECAUSE NO ADJUSTMENT WAS MADE, IT CO ULD NOT BE ARGUED THAT PROVISIONS OF SECTION 10A(7) WERE NOT APPL ICABLE. THE ASSESSEE ALSO EXPLAINED THAT M/S. CLASSIC DIAMOND INDIA LTD. WHICH WAS ALSO IN SIMILAR BUSINESS HAD DECLARED PROFIT MARGIN OF 19.42% IN THE RELEVANT YEAR AND, THEREFORE, PROFIT DECLARED BY THE ASSESSEE COULD NOT BE SAID TO BE EXCESSIVE. THE AO, HOWEVER, OBSERVED THAT THE ASSESSEES OWN CASE WAS BEST COMPARISON AND THE ASSESSEE HAD NOT BEEN ABLE TO EXPLAIN SATISFACTORILY THE SUBSTANTIAL RISE IN GP RATE THIS YEAR. THE AO, FURTHER OBSERVED, THAT M/S. SANGHVI EX PORTS HAD PROVIDED CREDIT FACILITIES TO THE ASSESSEE WHICH WAS CLEAR F ROM THE FACT ITA NO.352 & 577/M/08 A.Y:04-05 8 THAT THE SUNDRY CREDITORS IN CASE OF THE ASSESSEE HAD INCREASE D TO RS .4.27 CRORES IN THIS YEAR COMPARED TO RS.1.65 CRORES IN THE IMMEDIATE PRECEDING YEAR AND THE MAJOR PORTION OF TH E CREDIT WAS IN THE NAME OF M/S. SANGHVI EXPORTS. THEREFORE, THE PUR CHASE RATE FROM M/S. SANGHVI EXPORTS WAS EXPECTED TO BE HIGHER THAN THE NORMAL RATE. BUT IN THIS CASE, IT WAS ACTUALLY SUBSTANTIALLY LOWER WHICH WAS NOT EXPLAINED. THE ASSESSEE BY SHOWING LOWER PURCHASE RATE F ROM M/S. SANGHVI EXPORTS HAD SHIFTED THE PROFIT OF THAT CONCERN TO ITSELF BECAUSE OF THE CLOSE CONNECTION WITH THE SAID PARTY. THE PROVI SION OF SECTION 10A(7) WERE, THEREFORE, APPLICABLE AS PROFITS SHOWN BY THE ASSESSEE WERE MORE THAN THE ORDINARY PROFITS BECAUSE OF THE TRA NSACTIONS WITH THE GROUP CONCERN. THE ORDINARY GP RATE SHOULD HAVE BEEN 10% BUT THE SAME WAS SHOWN AS 16.8%. THE AO, THEREFORE, ADOPT ED GP RATE OF 10% AND THE EXTRA PROFIT DECLARED BY THE ASSESSEE TO THE TUNE OF RS.4,98,18,823/- WAS REDUCED FROM THE PROFIT AND DEDUCT ION UNDER SECTION 10A WAS ALLOWED AT RS.1,89,37,109/-. 3.4 SIMILAR, ADJUSTMENT WAS MADE BY THE AO IN RESPECT OF LA BOUR CHARGES ALSO. THE AO NOTED THAT EXPENDITURE ON OWN EMP LOYEES THIS YEAR HAD INCREASED TO RS.4.10 CRORES AS COMPARED TO RS.3.4 7 CRORES IN ASSESSMENT YEAR 2003-04. HOWEVER, THE LABOUR CHARGES DECRE ASED TO ONLY RS.15.00 LACS AS COMPARED TO RS. 73.00 LACS IN ASSESSMENT YEAR ITA NO.352 & 577/M/08 A.Y:04-05 9 2003-04, THOUGH THE RAW MATERIAL CONSUMPTION HAD DECL INED TO 20%. COMPARITIVE POSITION WAS NOTED AS UNDER :- PARTICULARS IX TH YEAR O F DEDUCTION A.Y. 2003-04 IN LACS XTH YEAR OF DEDUCTION A.Y. 2004-05 IN LACS NO DEDUCTION A.Y. 2005- 06 EMPLOYMENT COST 347 410 526 LABOUR CHARGES 73 15 75 RAW MATERIAL CONSUMPTION 6676 5511 3979 3.5 THE AO OBSERVED THAT THE ASSESSEE WAS ASKED TO PROVIDE DETAILS OF EMPLOYEES WHICH WERE NOT GIVEN. THE ASSESSEE ALSO DID NOT PROVIDE DETAILS OF OVERTIME WORK DONE BY THE EMPLOYEES. THE AO ALS O NOTED THAT THE ASSESSEE HAD STARTED A DESIGNING CENTRE IN PRINCE A RCADE OUTSIDE SEEPZ BUT THE ASSESSEE DID NOT GIVE EMPLOYEES COST FOR THIS C ENTRE AND THE DETAILS OF DESIGNING WORK DONE AT THE CENTRE. THE AO, THEREFO RE, OBSERVED THAT THERE WAS POSSIBILITY OF DIVERSION OF LABOUR COST TO ASSE SSEES SISTER CONCERN M/S. SANGHVI STAR AND OTHER CONCERNS. IT WAS ALSO OBSERVED BY HIM THAT INCREASE IN OWN EMPLOYEE COST WAS BECAUSE OF NORMAL INCREME NT. IT WAS NOTED BY HIM THAT IN NEXT ASSESSMENT YEAR I.E. ASSESSME NT YEAR 2005-06, THE LABOUR CHARGES AGAIN INCREASED TO RS.75.00 LACS THOUGH CONSUMPTION OF RAW MATERIAL HAD DECLINED SUBSTANTIALLY. THE AO, THEREFORE, CONCLUDED THAT LOWER LABOUR CHARGES THIS YEAR WERE DUE TO DIVERSION OF LABOUR TO OTHER CONCERNS. THE ASSESSEE HAD M ANIPULATED LABOUR CHARGES BY HAVING THE SHARING ARRANGEMENT ON ASSO RTMENT ITA NO.352 & 577/M/08 A.Y:04-05 10 ACTIVITY IN THE PREMISES OF M/S. SANGHVI EXPORTS AND DE SIGNING ACTIVITIES IN THE NEW PREMISES AT PRINCE ARCADE OUTSIDE SE EPZ. THE AO, THEREFORE, APPLIED THE PROVISIONS OF SECTION 40A(7) TO THE LABOUR CHARGES ALSO AND REDUCED PROFIT BY RS.60.00 LACS. 3.6 THE AO THUS MADE TOTAL ADJUSTMENT UNDER SECTION 10A(7) OF RS.5,58,18,823/-, RS. 4,98,18,823/- + RS.60,00,000/- AFTER REDUCING THE PROFIT BY THE ABOVE AMOUNT. THE AO COMPUTED ELIGIB LE PROFIT UNDER SECTION 10A AT RS.1,89,37,109/- AND DEDUCTION UNDER SECTION 10A WAS COMPUTED AT RS.1,89,37,109/- AS THE ENTIRE SALES OF THE ASSESSE E WERE EXPORT SALES. THE TOTAL INCOME WAS THUS COMPUTED AT RS.6,10,05,440/- IN PLACE OF NIL INCOME RETURNED BY THE ASSESSEE. 3.7 THE ASSESSEE DISPUTED THE DECISION OF AO AND SU BMITTED BEFORE CIT(A) THAT AO HAD NOT BROUGHT ON RECORD ANY SPECIFIC INST ANCE TO SHOW THAT THE TRANSACTIONS WITH THE SISTER CONCERN HAD RESULTED I N HIGHER INCOME TO THE ASSESSEE. IT WAS POINTED OUT THAT THE AO HAD WRONG LY COMPUTED AVERAGE PURCHASE PRICE OF PER CARAT BY USING THE FIGURES FO R DIAMONDS CONSUMPTION INSTEAD OF ACTUAL PURCHASE. IN CASE THE CORRECT FI GURES WERE ADOPTED, THE AVERAGE PURCHASE RATE PER CARAT THIS YEAR WAS RS.4, 205/- COMPARED TO RS.4,620/- IN ASSESSMENT YEAR 2003-04. THE DETAILE D COMPUTATION WAS GIVEN AS UNDER :- COMPUTATION MADE BY AO A.Y.2004 - 05 A.Y. 2003 - 04 ITA NO.352 & 577/M/08 A.Y:04-05 11 TOTAL POLISHED DIAMONDS CONSUMED (RS.IN LAKHS) 3,662.34 4,772.11 TOTAL POLISHED DIAMONDS CONSUMED IN CTS. 87,336.43 90,443.91 AVERAGE RATE PER CARAT 4,193 5,276 CORRECT COMPUTATION A.Y. 2004 - 05 A.Y. 20 03 - 04 TOTAL POLISHED DIAMONDS PURCHASED (RS. IN LAKHS) 3,855.96 4,661.65 TOTAL POLISHED DIAMONDS PURCHASED IN CTS. 91,691.35 100.909.18 AVERAGE RATE PER CARAT 4,205 4 ,620 3.8 THE ASSESSEE ARGUED THAT ONLY ON THE BASIS OF A VERAGE PRICE, IT COULD NOT BE CONCLUDED THAT THE ASSESSEE HAD DIVERTED PRO FIT FROM GROUP CONCERN AS THERE WERE SUBSTANTIAL DIFFERENCES IN SELLING RATES IN RESPECT OF THE SAME GRADE OF DIAMOND. THE ACTUAL SELLING PRICE DEPENDE D ON SEVERAL FACTORS SUCH AS NUMBER OF PIECES OF DIAMONDS PER CARAT USED, THE IR QUALITY ETC. THEREFORE, FOR THE SAME CARATS OF DIAMONDS USED PRICES COULD V ARY STEEPLY DEPENDING UPON THE NUMBER OF PIECES USED AND THEIR QUALITY. IT WAS ALSO SUBMITTED THAT LOWER QUALITY OF DIAMONDS CONSUMPTION WAS THE MAIN REASON FOR THE INCREASE IN GP RATE. IT WAS POINTED OUT THAT PRODUCT MIX TH IS YEAR WAS DIFFERENT FROM THAT IN THE EARLIER YEAR IN WHICH THE ITEMS MANUFAC TURED WERE MORE HIGH VALUED THAN LOWER VALUE ITEMS LIKE RINGS, AND EAR T OPS. IT WAS ALSO POINTED OUT THAT ITEMS LIKE EAR TOPS, PENDANTS AND RINGS WH ICH HAD LOWER DIAMOND CONTENT, HAD BETTER REALIZATION BY WAY OF INCREASE IN AVERAGE UNIT PRICE. COMPARATIVE DETAILS OF PRODUCT MIX WAS GIVEN AS UND ER :- ITA NO.352 & 577/M/08 A.Y:04-05 12 TYPE OF JEWELERY ASSESSMENT 2004-05 YEAR ASSESSMENT YEAR 2003-04 QTY. NO./UNITS VALUE RS. LACS PIECES QTY. NO./UNITS VALUE RS. LACS A.U.P BANGLES 684 56.19 8,215 509 83.12 16,331 BRACELETS 11,417 1,138.42 9,971 17,535 2,712.44 15,469 EAR TOPES 47,457 1,823.76 3,843 8,090 635.87 3,515 NECKLACES 1,914 228.47 11,937 1,040 238.93 22,974 PENDANTS 43,493 1,572.53 3,616 41,314 1,256.22 3,041 RINGS 58,988 2,535.82 4,299 44,113 2,937.58 6,659 TOTAL 7,355.19 7,864.16 3.9 THE ASSESSEE ALSO SUBMITTED THAT THE ONUS WAS O N THE REVENUE TO PROVE THAT THE PROFIT OF THE ASSESSEE HAD BEEN INFL ATED. THE ASSESSEE ALSO REITERATED THE SUBMISSIONS MADE BEFORE THE AO THAT NO ADJUSTMENT HAD BEEN MADE BY THE TPO WHICH SHOWS THAT PRICE WERE AT ARMS LENGTH. FURTHER, TRANSACTION AT SEEPZ WERE CHECKED BY CUSTOMS AUTHOR ITIES AND THERE WAS NO SCOPE OF MANIPULATION. AS REGARDS THE TRANSFER OF PROFITS, IT WAS ALSO SUBMITTED THAT M/S. SANGHVI EXPORTS HAD EARNED NET PROFIT BEFORE DEPRECIATION OF RS.18.24 CRORES IN ASSESSMENT YEAR 2004-05 ON TURNOVER OF RS.502 CRORES COMPARED TO PROFIT OF RS.18.34 CRORES ON TURNOVER OF RS.445.75 CRORES IN ASSESSMENT YEAR 2003-04. IT WAS, FURTHER , POINTED OUT THAT SIMILAR GROSS PROFIT OF RS.19.4% HAD BEEN SHOWN BY M/S. CLA SSIC DIAMOND INDIA LTD. IN SIMILAR BUSINESS. ACCORDINGLY, IT WAS URGED THAT NO ADJUSTMENT SHOULD BE MADE ON ACCOUNT OF PURCHASES. AS REGARDS THE LABOUR COST IT WAS SUBMITTED THAT REDUCED LABOUR EXPENSES WERE ON ACCOUNT OF THE FOLLOWING FACTORS:- I) ON ACCOUNT OF LOWER CONTENT OF DIAMONDS; II) ON ACCOUNT OF PRODUCT MIX; ITA NO.352 & 577/M/08 A.Y:04-05 13 III) ON ACCOUNT OF NUMBER OF EMPLOYEES INCREASED D URING THE YEAR AND IV) ON ACCOUNT OF DOUBLE SHIFT WORK DURING PART OF THE YEAR 3.10 CIT(A) AFTER CONSIDERING THE SUBMISSIONS OF T HE ASSESSEE OBSERVED THAT THERE WAS NO DISPUTE THAT FOR THE REL EVANT YEAR THE ASSESSEE HAD SHOWN EXCESSIVE HIGH GP RATE OF 16.80%. IT WAS ALSO AN ACCEPTED FACT THAT SUBSTANTIAL PURCHASES HAD BEEN MADE FROM A GRO UP CONCERN. CIT(A), THEREFORE, OBSERVED THAT, IN PRINCIPLE, THE PROVISI ONS OF SECTION 10A(7) COULD BE INVOKED. HOWEVER, HE FURTHER OBSERVED THAT THE S AID PROVISION COULD BE INVOKED ONLY TO THE EXTENT OF INCREASE IN PROFITS W HICH IS DIRECTLY REFERABLE TO COLLUSIVE TRANSACTIONS WITH THE GROUP TRANSACTIONS. CIT(A) NOTED THAT THE AVERAGE PURCHASE PRICE PER CARAT FROM M/S. SANGHVI EXPORTS WAS RS.3,445/- AND THE AVERAGE RATE IN RESPECT OF SIMILAR DIAMONDS PURCHASED FROM NON ASSOCIATE CONCERN WAS RS.3,517/-. THUS THE AVERAGE PURCHASE PRICE FROM THE SISTER CONCERN WAS LOWER BY RS.72/- PER CARAT. THE ASSESSEE HAD PURCHASED 57953.10 CARATS FROM M/S. SANGHVI EXPORTS FOR A SUM OF RS.19,96,51,322/-. APPLYING THE DIFFERENCE OF 72 PER CARAT TO THE TOTA L PURCHASE OF 57953.10 FROM M/S. SANGHVI EXPORTS THE EXCESS PROFIT TRANSFE RRED TO THE ASSESSEE CAME TO RS.41,72,623/-. CIT(A) THUS CONFIRMING ADJUSTME NT ON ACCOUNT OF PURCHASE FROM SISTER CONCERN TO THE ABOVE EXTENT. AS REGARD THE LABOUR CHARGES, CIT(A) OBSERVED THAT THOUGH THE EMPLOYEE C OST HAD INCREASED FROM RS.3.47 CRORES TO RS.4.10 CRORES, A PART OF IT COUL D BE ATTRIBUTED TO REGULAR ANNUAL INCREMENT. CIT(A) FURTHER OBSERVED THAT CONS IDERING THE FACTORS LIKE CHANGE IN PRODUCT MIX ETC. THE TOTAL DISALLOWANCE M ADE BY AO AT RS.60.00 LACS WAS ON THE HIGHER SIDE. HE, THEREFORE, RESTRIC TED THE DISALLOWANCE TO ITA NO.352 & 577/M/08 A.Y:04-05 14 RS.20.00 LACS. CIT(A) THUS UPHELD, TOTAL ADJUSTMEN T ON ACCOUNT OF PURCHASES AND LABOUR CHARGES AT RS.61,72,623/-. AGGRIEVED BY THE SAID DECISION BOTH THE PARTIES ARE IN APPEAL BEFORE THE TRIBUNAL. 3.11 BEFORE US, THE LD. AR FOR THE ASSESSEE REITER ATED THE SUBMISSIONS MADE BEFORE LOWER AUTHORITIES. IT WAS ARGUED THAT COMPARISON COULD NOT BE MADE ON THE BASIS OF AVERAGE PURCHASE RATE. IT WAS SUBMITTED THAT THE DIAMONDS PURCHASED BY THE ASSESSEE CONSISTED OF SEV ERAL GRADES AND THEREFORE COMPARISON SHOULD BE MADE ONLY WITH RESPE CT TO THE SAME OR SIMILAR GRADES AND, IN CASE, THIS PROCESS WAS ADOPT ED, THE PURCHASES FROM M/S. SANGHVI EXPORTS WERE AT A HIGHER RATE. HE REFE RRED TO DETAILS OF PURCHASE FOR DIFFERENT GRADE OF DIAMONDS PLACED AT PAGE-187 OF THE PAPER BOOK WHICH GAVE AVERAGE PURCHASE PRICE PER CARAT IN RESPECT OF THESE GRADES AT RS.3,697/- PER CARAT. THE COMPARATIVE DETAILS O F PURCHASES IN RESPECT OF SAME GRADES IN CASE OF M/S. DHAVAL EXPORTS AND M/S. SUPER DIAM WERE PLACED AT PAGE-202 OF THE PAPER BOOK WHICH GAVE THE AVERAGE PURCHASE RATE PER CARAT OF RS.3,518/-. IT WAS THUS SUBMITTED THA T IN RESPECT OF PURCHASE OF SAME GRADES, THE AVERAGE PURCHASE PRICE IN CASE OF PURCHASE FROM M/S. SANGHVI EXPORTS WERE MORE. THE OTHER PURCHASES FRO M M/S. SANGHVI EXPORTS WHICH WERE NON-COMPARABLE WERE GIVEN AT PAGE-186 O F THE PAPER BOOK AS PER WHICH AVERAGE PURCHASE RATE WAS RS.2,847/-, BUT THE SAME WAS NOT COMPARABLE. IT WAS POINTED OUT THAT CIT(A) HAD MADE A MISTAKE IN UPHOLDING ADDITION @ 72 PER CARAT BY MAKING WRONG COMPARISON. HE HAD COMPARED THE OVER ALL AVERAGE RATE IN RESPECT OF ENTIRE PURCHASE S OF DIAMONDS FROM M/S. SANGHVI EXPORTS OF RS.3,445/- PER CARAT TO THE AVER AGE PURCHASES FROM M/S. ITA NO.352 & 577/M/08 A.Y:04-05 15 SUPER DIAM AND M/S. DHAVAL EXPORTS IN RESPECT OF CO MPARABLE GRADE OF RS.3,518/- PER CARAT. IT WAS POINTED OUT THAT THE AVERAGE RATE OF RS.3,518/- PER CARAT IN RESPECT OF M/S. DHAWAL EXPORTS AND M/S . SUPER DIAM COULD BE COMPARED ONLY TO COMPARABLE GRADES IN RESPECT OF M/ S. SANGHVI EXPORTS IN RESPECT OF WHICH AVERAGE RATE WAS RS.3,697/- PER CA RAT. THE ADJUSTMENT UPHELD BY CIT(A) ON ACCOUNT OF PURCHASE FROM SISTER CONCERN WAS THUS NOT CORRECT AND SHOULD BE DELETED. 3.12 IN RELATION TO LABOUR CHARGES, IT WAS SUBMITT ED THAT PROVISIONS OF SECTION 80IA(8) WERE NOT APPLICABLE WHICH APPLIED O NLY TO THE CASES WHERE GOODS OR SERVICES WERE TRANSFERRED BETWEEN THE ELIG IBLE BUSINESSES AND OTHER BUSINESSES CARRIED ON BY THE ASSESSEE. IN THE PRE SENT CASE, THERE WAS NO TRANSFER OF GOODS OR SERVICES. IT WAS ALSO SUBMITT ED THAT LABOUR CHARGES HAD BEEN REDUCED DURING THE YEAR BECAUSE OF INCREASE IN NUMBER OF EMPLOYEES WHICH HAD GONE UP TO 379 COMPARED TO 328 IN ASSESSM ENT YEAR 2003-04. IT WAS POINTED OUT THAT DETAILS WERE GIVEN BEFORE AO W HICH ARE PLACED AT PAGE- 130 OF THE PAPER BOOK. AS REGARDS THE ALLEGATION B Y AO OF TRANSFER OF LABOUR CHARGES TO M/S. SANGHVI EXPORTS, THE DETAILS GIVEN AT PAGE-131 OF THE PAPER BOOK SHOW THAT LABOUR COST AS PERCENTAGE OF SALES OF JEWELLERY IN ASSESSMENT YEAR 2004-05 WAS 10.2% COMPARED TO 9.49% IN ASSESSM ENT YEAR 2003-04. THERE WAS THUS NO DIVERSION OF LABOUR. AS REGARDS M/S. SANGHVI STAR, IT WAS POINTED OUT THAT TOTAL SALE WAS ONLY 76.85 LACS WHI CH WAS TOO SMALL TO ABSORB SUBSTANTIAL LABOUR CHARGES. MOREOVER, THE ASSESSEE FROM THAT CONCERN HAD RECOVERED RS.8,57,641/- ON ACCOUNT OF WORK DONE FOR THEM BY ITS EMPLOYEES. IT WAS ALSO SUBMITTED THAT IN CASE EMPLOYEE COST AN D LABOUR CHARGES WERE ITA NO.352 & 577/M/08 A.Y:04-05 16 CONSIDERED TOGETHER, THERE WAS NO DIFFERENCE AS THI S YEAR TOTAL EXPENDITURE WAS RS.4.24 CRORES COMPARED TO RS.4.20 CRORES IN TH E IMMEDIATE PRECEDING YEAR. IT WAS ACCORDINGLY URGED THAT ADJUSTMENT ON ACCOUNT OF LABOUR CHARGES SHOULD BE DELETED. 3.13 THE LD. DR ON THE OTHER HAND STRONGLY SUPPORT ED THE ORDER OF AO. IT WAS POINTED OUT THAT AVERAGE SALE RATE PER C ARAT BY M/S. SANGHVI EXPORTS WAS RS.7,310/-. SALE MADE BY M/S. SANGHVI EXPORTS TO THE ASSESSEE WAS AT AVERAGE RATE OF RS.3,445/- WHICH WAS NOT EXP LAINED. THE ASSESSEE DID NOT GIVE COST OF PURCHASES IN CASE OF M/S. SANG HVI EXPORTS. IT WAS ALSO SUBMITTED THAT M/S. SANGHVI EXPORTS WAS NOT 100% TA X EXEMPT AND, THEREFORE, BY TRANSFERRING PROFIT TO THE ASSESSEE T HERE WAS TAX ADVANTAGE. THE GP RATE OF THE ASSESSEE HAD INCREASED ABNORMALL Y DURING THE YEAR WHICH WAS NOT EXPLAINED PROPERLY THOUGH TURNOVER HAD DECL INED. IT WAS FURTHER SUBMITTED THAT THE GRADE WISE COMPARISON GIVEN BY T HE ASSESSEE WAS NOT RELIABLE AS WITHIN THE SAME GRADE THERE WAS STEEP V ARIATION IN PRICES WHICH WAS CLEAR FROM THE DETAILS GIVEN IN PAPER BOOK. IT WAS POINTED OUT THAT THE ASSESSEE HAD NOT GIVEN PIECE-WISE DETAILS PER CARAT WHICH HAD MAJOR IMPACT ON THE PRICES. IT WAS FURTHER ARGUED THAT IN RESPE CT OF PURCHASES FROM THE GROUP CONCERN, ON AVERAGE, THERE WERE 20 PIECES PER CARAT WHEREAS IN RESPECT OF OTHER PURCHASES THERE WERE 350 PER CARAT WHICH SHOWS THAT THE SIZE OF DIAMOND PURCHASED FROM THE GROUP CONCERN WA S BIGGER AND, THEREFORE, PRICE SHOULD HAVE BEEN HIGHER. BUT IT W AS JUST REVERSE. THE LD. AR ALSO POINTED OUT THAT IN ASSESSMENT YEAR 2002-03, I N ASSESSEES OWN CASE, ITA NO.352 & 577/M/08 A.Y:04-05 17 SIMILAR ADJUSTMENT HAD BEEN MADE BY AO UNDER SECTIO N 10A(7) WHICH HAD BEEN UPHELD BY THE TRIBUNAL IN ITA NO.89/M/2006. 3.14 AS REGARDS LABOUR CHARGES, IT WAS SUBMITTED TH AT THE PROVISIONS OF SECTION 80IA(8) ALSO APPLIED TO SERVICES AND, THERE FORE, LABOUR CHARGES WERE ALSO COVERED BY THE PROVISIONS. IT WAS ALSO POINTE D OUT THAT THE VARIOUS DETAILS MENTIONED BY THE LD. AR HAD NOT BEEN GIVEN BEFORE THE AO AND THEREFORE IT COULD NOT BE VERIFIED. IT WAS ACCORDI NGLY SUBMITTED THAT THE ADJUSTMENT MADE BY THE AO WAS JUSTIFIED. 3.15 IN REPLY, THE LD. AR FOR THE ASSESSEE SUBMITT ED THAT THE GP RATE WAS NOT ONLY HIGH IN THIS YEAR BUT ALSO IN EARLIER YEARS. IT WAS POINTED OUT THAT IN ASSESSMENT YEAR 1999-00 TO 2001-02, THE ASS ESSEE HAD SHOWN GP RATES VARYING FROM 14.96% TO 18.50%. IT WAS ALSO P OINTED OUT THAT THE AO WAS NOT CORRECT IN STATING THAT IN RESPECT OF PURCH ASES FROM OTHER CONCERNS THE AVERAGE NUMBER OF PIECES PER CARAT WAS 350 WHIC H WAS WRONG AND THE ACTUAL FIGURE WAS ONLY 35. AS REGARD THE AVERAGE S ALE RATE IN CASE OF M/S. SANGHVI EXPORTS OF RS.7,310 PER CARAT, IT WAS SUBMI TTED THAT THE COMPARISON WAS NOT RELEVANT AS SALE TO THE ASSESSEE BY M/S. SA NGHVI EXPORTS CONSTITUTED ONLY 4% OF TOTAL SALES MADE BY THEM. IN CASE GRADE WISE COMPARISON WAS MADE, THE PURCHASE RATE FROM M/S. SANGHVI EXPORTS W AS HIGHER. IN RELATION TO THE DECISION OF THE TRIBUNAL IN ASSESSMENT YEAR 2002-03, IT WAS SUBMITTED THAT THE CASE WAS DIFFERENT AS ADJUSTMENT HAD BEEN MADE ON THE BASIS OF SALE RATE AND NOT GP RATE. ITA NO.352 & 577/M/08 A.Y:04-05 18 3.16 WE HAVE PERUSED THE RECORDS AND CONSIDERED THE RIVAL CONTENTIONS CAREFULLY. THE DISPUTE IS REGARDING ADJUSTME NTS MADE BY THE AO TO THE PROFIT OF THE ASSESSEE ON ACCOUNT OF TRANSACT IONS MADE WITH THE GROUP CONCERNS UNDER THE PROVISIONS OF SECTION 1 0A(7) READ WITH SECTION 80A(10) AND 80A(8). THE ASSESSEE IS IN THE B USINESS OF MANUFACTURING AND EXPORTING OF DIAMOND STUDDED GOLD JEWELLERY. THE ASSESSEE FOR THE ASSESSMENT YEAR 2004-05 HAD DECLARED GP RAT E OF 16.80% OF TURNOVER OF RS.73.26 CRORES COMPARED WITH GP RATE OF 9.93% IN THE IMMEDIATE PRECEDING YEAR I.E. ASSESSMENT YE AR 2003- 04.ON TURNOVER OF RS. 79 CRORES. EVEN IN ASSESSMENT YEAR 2002-03, GP RATE DECLARED BY THE ASSESSEE WAS ONLY 10.89%. THERE ARE NO DISPUTES ABOUT THESE FACTS. THERE IS ALSO NO DISPUTE THAT PURCHASES DURING THE YEAR FROM ASSESSEE CONCERN I.E. M/S. SAGHVI EXP ORTS HAD INCREASED ABNORMALLY TO MORE THAN 50% OF THE TOTAL PU RCHASES COMPARED TO 5% OF TOTAL PURCHASES IN THE IMMEDIATE PRECE DING YEAR AND THAT PURCHASES FROM UNRELATED PARTIES I.E. DHAVAL E XPORTS AND M/S. SUPER DIAM HAD DECLINED SUBSTANTIALLY. OTHER UNDISPUTE D FACTS ARE THAT AVERAGE PURCHASE RATE PER CARAT OF DIAMONDS DURING THE YEAR DECLINED SUBSTANTIALLY TO RS.4,205/- PER CARAT FROM RS. 4,602/- PER CARAT IN THE IMMEDIATE PRECEDING YEAR AND THAT THE AV ERAGE PURCHASE RATE OF DIAMONDS PER CARAT DURING THE YEAR FROM M/S. SAGHVI EXPORTS WAS RS.3,445/- AGAINST THE OVER ALL AVERAGE RATE OF PU RCHASES OF ITA NO.352 & 577/M/08 A.Y:04-05 19 RS.4,205/-. THE DIAMOND PIECES ON AVERAGE WERE LARGER IN SIZE IN CASE OF PURCHASES FROM GROUP CONCERN AT 20 PIECES PER CARAT AS COM PARED TO 35 PIECES PER CARAT IN CASE OF NOON-RELATED PURCHASES A ND, THEREFORE, RATE SHOULD HAVE BEEN HIGHER FROM GROUP CO NCERNS. FURTHER, AO ALSO NOTED FROM AUDITED ACCOUNTS OF M/S. SA GHVI EXPORTS AND ABOUT WHICH THERE IS NO DISPUTE THAT AVERAGE SALE R ATE OF DIAMOND PER CARAT IN CASE OF THAT CONCERN WAS RS.7,310/- WHEREAS T HE AVERAGE SALE RATE TO THE ASSESSEE WAS ONLY RS.3,445/-. THERE IS AL SO NO DISPUTE THAT M/S. SAGHVI EXPORTS IS A GROUP CONCERN IN WH ICH ALL THE DIRECTORS OF THE ASSESSEE COMPANY ARE PARTNERS AND THAT TH E SAID CONCERN HOLDS 52.63% OF EQUITY CAPITAL OF THE COMPANY. THE INCOME OF THE ASSESSEE IS EXEMPT UNDER SECTION 10A OF THE INCOME T AX ACT AND THE ASSESSMENT YEAR 2004-05 WAS THE LAST YEAR FOR CLAIMING DEDUCTION UNDER SECTION 10A. FURTHER, THE INCOME OF M/S. SAGHVI EXPORTS IS EXEMPT UNDER SECTION 80HHC ONLY TO THE EXTENT OF 30% AN D, THEREFORE, ANY TRANSFER OF PROFIT FROM M/S. SAGHVI E XPORTS TO THE ASSESSEE FIRM HAS TAX ADVANTAGE FOR THE GROUP. 3.17 IN THE BACK DROP OF ABOVE FACTUAL POSITION IT IS R EQUIRED TO BE EXAMINED WHETHER THE PROFITS OF M/S. SAGHVI EXPORTS WE RE DIVERTED TO THE ASSESSEE COMPANY AND THE PROVISIONS OF SECTION 10A(7) R. W.S. 80IA WERE APPLICABLE. BUT PROVISIONS OF SECTION 10A PROVIDE T HAT PROVISIONS CONTAINED IN SEC.80IA(10) AND SECTION 80IA(8) AS FAR AS WOULD APPLY ITA NO.352 & 577/M/08 A.Y:04-05 20 TO SECTION 10A ALSO. SECTION 80IA(10) PROVIDES THAT IN CASE DUE TO CLOSE CONNECTION BETWEEN ASSESSEE AND ANY OTHER PERSON, BUSI NESS TRANSACTIONS ARE SO ARRANGED THAT THEY PRODUCE MORE THAN ORDINARY PROFIT IN CASE OF THE ASSESSEE, THEN AO WHILE COMPUTING TH E PROFIT AND GAINS OF ELIGIBLE BUSINESS FOR THE PURPOSE OF DEDUCTION U NDER SAID SECTION, SHALL TAKE THE AMOUNT OF PROFIT AS MAY BE REASO NABLE DEEMED TO HAVE BEEN DERIVED THERE FROM. SIMILAR PROVISION EXISTS UNDER SECTION 80IA(8) IN RELATION TO TRANSFER OF GOODS OR SERV ICES BETWEEN THE CONNECTED CONCERNS AND IN CASE THE TRANSFER IS NOT AT THE MA RKET VALUE THE AO MAY COMPUTE THE PROFIT AND GAINS OF ELIGIBLE B USINESS TREATING THE TRANSFER VALUE OF GOODS AND SERVICES AT MARKET VALUE THE SAID PROVISIONS OF SECTION 80IA(10) AND 80IA(8) ARE REPRODUCE D BELOW FOR READY REFERENCE:- SECTION 80IA(10) : WHERE IT APPEARS TO THE ASSESS ING OFFICER THAT, OWING TO THE CLOSE CONNECTION BETWEEN THE ASS ESSEE CARRYING ON THE ELIGIBLE BUSINESS TO WHICH THIS SEC TION APPLIES AND ANY OTHER PERSON, OR FOR ANY OTHER REASON, THE COURSE OF BUSINESS BETWEEN THEM IS SO ARRANGED THAT THE BUSI NESS TRANSACTED BETWEEN THEM PRODUCES TO THE ASSESSEE MO RE THAN ORDINARY PROFITS WHICH MIGHT BE EXPECTED TO ARISE I N SUCH ELIGIBLE BUSINESS, THE ASSESSING OFFICER SHALL, IN COMPUTING THE PROFITS AND GAINS OF SUCH ELIGIBLE BUSINESS FOR THE PURPOSES OF THE DEDUCTION UNDER THIS SECTION, TAKE THE AMOUNT O F PROFITS AS MAY BE REASONABLY DEEMED TO HAVE BEEN DERIVED THERE FROM. SECTION 80IA(8) : WHERE ANY GOODS OR SERVICES HELD FOR THE PURPOSES OF THE ELIGIBLE BUSINESS ARE TRANS FERRED TO ANY OTHER BUSINESS CARRIED ON BY THE ASSESSEE, OR WHERE ANY GOODS OR SERVICES HELD FOR THE PURPOSES OF ANY OTHER BUSI NESS CARRIED ON BY THE ASSESSEE ARE TRANSFERRED TO THE ELIGIBLE BUSINESS AND, IN EITHER CASE, THE CONSIDERATION, IF ANY, FOR SUCH TRANSFER AS RECORDED IN THE ACCOUNTS OF THE ELIGIBLE BUSINESS D OES NOT CORRESPOND TO THE MARKET VALUE OF SUCH GOODS AND SE RVICES AS ITA NO.352 & 577/M/08 A.Y:04-05 21 ON THE DATE OF THE TRANSFER, THEN FOR THE PURPOSES OF THE DEDUCTION UNDER THIS SECTION, THE PROFITS AND GAINS OF SUCH ELIGIBLE BUSINESS SHALL BE COMPUTED AS IF THE TRANS FER, IN EITHER CASE, HAD BEEN MADE AT THE MARKET VALUE OF SUCH GOO DS OR SERVICES AS ON THAT DATE: PROVIDED THAT WHERE, IN THE OPINION OF THE ASSESSING OFFICE R, THE COMPUTATION OF THE PROFITS AND GAINS OF THE ELI GIBLE BUSINESS IN THE MANNER HEREINBEFORE SPECIFIED PRESENTS EXCEP TIONAL DIFFICULTIES, THE ASSESSING OFFICER MAY COMPUTE SUC H PROFITS AND GAINS ON SUCH REASONABLE BASIS AS HE MAY DEEM FIT. EXPLANATION FOR THE PURPOSES OF THIS SUB-SECTION, MARKET VALUE, IN RELATION TO ANY GOODS OR SERVICES, MEANS THE PRICE THAT SUCH GOODS OR SERVICES WOULD ORDINARILY FETCH IN THE OPEN MARKET. 3.18 NO DOUBT IT IS TRUE THAT BURDEN IS ON THE REVENU E TO SHOW THAT THE ASSESSEE HAD SO ARRANGED THE TRANSACTIONS WITH THE SIST ER CONCERN THAT IT PROVIDED MORE THAN ORDINARY PROFIT IN THE CA SE OF THE ASSESSEE. HOWEVER, ONCE THE AO DEMONSTRATED THAT GP RATE HAD INCR EASED DURING THE YEAR ABNORMALLY AND TRANSACTIONS WITH THE SISTER CON CERN HAD ALSO INCREASED SUBSTANTIALLY DURING THE YEAR AND PURCHASE RAT E FROM THE SISTER CONCERN WAS MUCH LOWER THAN THE AVERAGE SALE RATE OF THAT CONCERN, THE INITIAL ONUS PLACED ON THE REVENUE IS DISCHAR GED AND THE ASSESSEE IS REQUIRED TO EXPLAIN THE MATTER SATISFACTORILY AS ALL MATERIAL FACTS ARE UNDER THE CONTROL OF THE ASSESSEE. THE GM WHEN ASKED ABOUT THE SUDDEN AND SUBSTANTIAL INCREASE IN GP RATE COULD NOT POINT OUT ANY SPECIFIC REASON. SUBSEQUENTLY, THE ASSESSEE EXPLAINED THAT HIGH GP RATE WAS BECAUSE OF LOWER QUALITY OF DIAMONDS PURCHASED A ND FALL IN VALUE OF DIAMONDS BUT THE SAME WAS NOT SUBSTANTIATED BY ANY EVIDENCE. IN CASE, LOWER QUALITY DIAMONDS WERE USED OR DIAMOND ITA NO.352 & 577/M/08 A.Y:04-05 22 PRICES HAD FALLEN, THIS WOULD HAVE ALSO RESULTED IN FAL L OF JEWELLERY PRICES AND OVER ALL GP RATE WOULD HAVE BEEN THE SAME. MOREOVER, IN THE SUBSEQUENT YEAR WHEN THE ASSESSEE WAS NOT ENTITLED FOR DEDUCTION UNDER SECTION 10A, GP RATE AGAIN CAME DOWN TO THE NORM AL FIGURE OF ABOUT 10%. THE ASSESSEE ALSO EXPLAINED THAT HIGH GP RAT E WAS BECAUSE OF DIFFERENT PRODUCT MIX AS DURING THE YEAR LOW ER VALUE ITEMS SUCH AS PENDANTS, RINGS AND EAR TOPS HAD INCREASED SUBSTANT IALLY ON WHICH PROFIT MARGIN WAS LOWER. HOWEVER, THE EXPLANATI ON IS NOT SUPPORTED BY ANY EVIDENCE. IT IS COMMON KNOWLEDGE THAT THE MORE SPECIALIZED IS AN ITEM, PROFIT MARGIN BECOMES MORE. THE REFORE, PROFIT MARGIN IN RESPECT OF SIMPLER ITEMS LIKE EAR TOPS ETC. ARE SUPPOSED TO BE LOWER THAN THE PROFIT IN RESPECT OF SPECIALIZED ITEM S SUCH AS NECKLACE, BANGLES ETC. THE DIAMOND CONTENT WILL NOT HAV E MUCH IMPACT ON GP RATE AS PROFIT MARGIN IN RESPECT OF DIAMO ND WILL BE THE SAME IRRESPECTIVE OF THE QUANTITY. MOREOVER TOTAL CONSU MPTION OF DIAMOND THIS YEAR WAS ALMOST SAME AT 87336.43 CARAT COMPA RED TO 90,443 CARAT LAST YEAR. AS REGARD THE LABOUR CHARGES, T HE PROFIT MARGIN WILL BE MORE IN RESPECT OF SPECIALIZED ITEMS LIK E NECKLACES, BANGLES ETC. WHICH HAVE BEEN PRODUCED IN LARGER NUMBE R THIS YEAR. THEREFORE, IN OUR VIEW, PRODUCT MIX WILL NOT HAVE MU CH IMPACT ON GP RATE. THERE IS THUS NO SATISFACTORY EXPLANATION REGARD ING EXCEPTIONAL GP RATE THIS YEAR. THE EXPLANATION OF THE ASSESSEE THAT GP RATE WAS ITA NO.352 & 577/M/08 A.Y:04-05 23 ALSO HIGH A FEW YEARS BACK IN ASSESSMENT YEARS 1999-00 TO 2 001-02 IS NOT RELEVANT AS COMPARISON HAS TO BE MADE WITH FIGUR ES IN THE IMMEDIATE PRECEDING YEAR AND IT WAS FOUND THAT NOT ON LY IN THE IMMEDIATE PRECEDING YEAR BUT ALSO IN ASSESSMENT YEAR 2002 -03, THE GP RATE WAS AROUND 10% . IT IS ALSO NOT EXPLAINED SATISFACTORILY AS TO HOW GP RATE SUDDENLY CAME BACK TO NORMAL IN THE IMMEDI ATE SUCCEEDING YEAR. 3.19 THE ASSESSEE ALSO COULD NOT GIVE ANY SATISFACTORY EXPLANATION AS TO WHY IN THIS YEAR PURCHASES FROM M/S. S ANGHVI EXPORTS INCREASED SUBSTANTIALLY WHEN THE OTHER PARTIES F ROM WHOM PURCHASES WERE MADE TILL LAST YEAR REMAINED IN THE SAME BUSINESS AND THAT M/S. SANGHVI EXPORTS WAS ALSO IN THE SAME BUSINESS IN THE EARLIER YEAR WHEN PURCHASES MADE FROM THIS CONCERN WERE NOMINAL. FURTHER, THERE IS NO SATISFACTORY EXPLANATION FOR M/S. SANGHVI EX PORTS SELLING DIAMONDS TO THE ASSESSEE AT A VERY LOW AVERAGE RATE OF RS.3,445/- PER CARAT WHERE THE OVERALL AVERAGE SALE RATE OF THAT CON CERN WAS RS.7,310/- PER CARAT. THE CLAIM THAT LOWER QUALITY DI AMONDS HAD BEEN PURCHASED IS NOT SUPPORTED BY ANY EVIDENCE. THE ASSESSEE CO ULD HAVE EASILY GIVEN THE COST OF PURCHASES MADE FROM M/S. SANGHV I EXPORTS IN THEIR BOOKS TO SHOW THAT THERE WAS NO CONCESSION MADE TO T HE ASSESSEE AS M/S. SANGHVI EXPORTS WAS UNDER ITS CONTROL. THE ASSESSEE, HOWEVER DID NOT GIVE DETAILS DESPITE REPEATED Q UERIES MADE ITA NO.352 & 577/M/08 A.Y:04-05 24 BY THE AO. IT DID NOT EVEN PRODUCE THE COPY OF BILLS A ND PACKING LIST OF PURCHASES MADE FROM M/S. SANGHVI EXPORTS DESPITE REPEATED REQUESTS. THESE DETAILS HAVE NOT BEEN PRODUCED EITHER BEFORE CIT (A) OR EVEN BEFORE US. IT HAS BEEN SUBMITTED THAT NP RATE OF M/S. SANGHVI EXPORTS WAS ALMOST THE SAME AT 18.24% COMPARED TO 18.34% IN TH E IMMEDIATE PRECEDING YEAR. THIS, HOWEVER, DOES NOT EXP LAIN THE LOWER SALE RATE OF DIAMONDS TO THE ASSESSEE. MOREOVER, PURCHASES FROM M/S. SANGHVI EXPORTS CONSTITUTED ONLY 4% OF TOTAL SALES OF TH AT CONCERN AND, THEREFORE, LOWER SALE RATE TO THE ASSESSEE WOULD NOT HA VE MUCH IMPACT ON THE OVERALL NET PROFIT RATE OF THAT CONCERN. 3.20 IT HAS ALSO BEEN EXPLAINED THAT ANOTHER CONCERN M /S. CLASSIC DIAMOND HAD SHOWN GP RATE OF 19.4% IN THE SAME BU SINESS. HOWEVER, FULL DETAILS OF THAT CONCERN ARE NOT AVAILABLE TO SHOW THAT THERE WERE NO TRANSACTIONS WITH ASSOCIATE CONCERNS IN THAT CASE AND THAT THE BUSINESS DONE BY THAT CONCERN WAS IDENTICAL. IN THE ABSENCE OF FULL DETAILS, NO PROPER COMPARISON IS POSSIBLE. THE ARGUMENT THAT THE TRANSACTIONS WERE CHECKED BY CUSTOM AUTHORITY IS ALSO NO T RELEVANT AS CUSTOM AUTHORITIES DO NOT MAKE ANY EXAMINATION FROM INCOME TAX ANGLE AND, MOREOVER M/S. SANGHVI EXPORTS ALSO ADMITTED THAT THEY HAD NOT MADE ANY SPECIAL SCRUTINY. SIMILARLY, NOT MAKING A NY PRICING ADJUSTMENT BY THE TPO IS ALSO NOT IRRELEVANT AS TP ADJ USTMENT ARE REQUIRED TO BE MADE IN CASE OF INTERNATIONAL TRANSACTIO NS WITH NON ITA NO.352 & 577/M/08 A.Y:04-05 25 RESIDENT ASSOCIATE CONCERNS WHEREAS IN THE PRESENT CASE, WE A RE CONCERNED WITH TRANSACTIONS BETWEEN TWO DOMESTIC PARTIES. 3.21 THE LD. AUTHORISED REPRESENTATIVE ALSO SUBMITTED THAT IN CASE COMPARISON WAS MADE WITH SAME GRADE OF DIAMONDS, PURCH ASE RATE IN CASE OF M/S. SANGHVI EXPORTS WAS HIGHER. IT H AS BEEN POINTED OUT THAT AVERAGE PURCHASE RATE IN CASE OF COMPARABLE G RADES FROM M/S. SANGHVI EXPORTS WAS RS.3,697/- WHEREAS FOR SIMILAR GRADES, AVERAGE PURCHASE RATE IN CASE OF UNRELATED PURCHASES WAS RS. 3,518/-. HOWEVER, A CAREFUL PERUSAL OF THE RECORD SHOWS THAT SUCH CO MPARISON COULD BE MISLEADING. WE FIND THAT WITHIN THE SAME COL OUR AND CUT, THERE IS STEEP VARIATION IN THE PRICES. FOR EXAMPLE, DI AMOND PRICES IN CASE OF GRADE, D-CUT OWLB / N VARIED FROM, RS .2,255/- TO RS.14,883/- PER CARAT AND SIMILARLY, IN CASE OF D-CUT OWLB PRICES VARI ED FROM RS .1,780 PER CARAT TO RS .17,364/- PER CARAT AND IN CASE OF D-CUT OW/N, FROM RS.2,250/- TO RS.8,034/- PER CARAT, WHICH IS CLEAR FROM THE DETAILS GIVEN AT PAGE 188 TO 189 OF THE PAPER BOOK. WHEN THERE IS SO STEEP VARIATION WITHIN THE SAME GRADE, ANY COMPARISON B ASED ON GRADE IS NOT RELIABLE. DIAMOND PRICES ARE HEAVILY INFLUENCED BY THE SIZE OF DIAMONDS BUT THE ASSESSEE IS NOT MAINTAINING PIECE-WISE DE TAILS OF DIAMONDS USED. IT IS ALSO TO BE NOTED, THAT ON AVERAG E DIAMONDS PURCHASED FROM THE GROUP CONCERN WERE LARGER IN SIZE THA N THOSE FROM OTHER CONCERNS AS AVERAGE NUMBER OF PIECES PER CARAT IN CASE OF GROUP ITA NO.352 & 577/M/08 A.Y:04-05 26 CONCERN WAS 20 WHEREAS IN CASE OF OTHERS, IT WAS 35. THERE FORE, ON THIS ACCOUNT ALSO, PURCHASE PRICE FROM THE GROUP CONCERN SHOU LD HAVE BEEN HIGHER. WE FURTHER NOTE FROM DETAILS AT PAGE 1 86 OF THE PAPER BOOK THAT PURCHASE RATE FROM M/S. SANGHVI EXPORTS IN CASE OF OTHER GRADES WAS ONLY RS.2,847/- PER CARAT. THEREFORE, IN OU R VIEW EXPLANATION BASED ON COMPARABLE GRADE IS NOT RELIABLE. THE GM AT THE TIME OF EXAMINATION ADMITTED THAT THE ASSESSEE WAS MAINT AINING REFERENCE NUMBERS OF DIAMONDS BUT THE SAME WAS NOT PRODU CED DURING THE ASSESSMENT PROCEEDINGS. THE ASSESSEE COULD EASILY GIVE THE COST OF PURCHASE IN CASE OF M/S. SANGHVI EXPORTS TO SHOW THAT T HERE WAS NO CONCESSIONAL RATE OF SALE TO THE ASSESSEE WHICH HAS NOT BEEN DONE. UNDER THESE CIRCUMSTANCES, THE AUTHORITIES WILL BE JUSTIFIE D TO GO BY THE AVERAGE RATE. IDENTICAL ISSUE HAD ARISEN IN THE CASE OF THE ASSESSEE IN THE ASSESSMENT YEAR 2002-03. THE ASSESSEE IN THAT YEAR HAD SOLD GOODS AT HIGHER RATE TO THE SISTER CONCERNS M/S. S ANGHVI DIAMONDS TO GENERATE MORE PROFITS. IN THE PRESENT CASE , PURCHASE HAS BEEN MADE FROM SISTER CONCERN AT LOWER RATE BUT THE EFF ECT IS THE SAME I.E.; SHIFTING OF PROFITS FROM SISTER CONCERN TO ITSELF. IN THAT YEAR, THE ASSESSEE HAD EXPLAINED THE HIGHER SALE RATE TO SISTER CONCER N ON THE GROUND OF LONGER CREDIT PERIOD ALLOWED AND ON THE GR OUNDS OF SUPPLY OF UNECONOMICAL QUANTITY JEWELLERY. THE TRIBUNAL IN THA T YEAR IN ITA NO.89/MUM/2006 HELD THAT THE EXPLANATION OF THE ASSESS EE WAS NOT ITA NO.352 & 577/M/08 A.Y:04-05 27 SUPPORTED BY PROPER EVIDENCE. THE TRIBUNAL ALSO OBSERV ED THAT IN CASE OF UNECONOMICAL QUANTITIES, THE PROFIT MARGIN SHOULD H AVE BEEN LOWER AND ACCORDINGLY CONFIRMED THE ADJUSTMENT MADE BY AO UND ER SECTION 10(7) R.W.S. 80IA(10). THE AVERAGE RATE OF SALES IN CA SE OF M/S. SANGHVI EXPORTS IS RS.7,310/- WHEREAS, AVERAGE SALE RATE PER CARAT TO THE ASSESSEE WAS ONLY RS.3,445/-. THE AUTHORITIES WILL, T HEREFORE, BE JUSTIFIED IN WORKING OUT THE SHIFTING OF THE PROFIT F ROM M/S. SANGHVI EXPORTS TO ASSESSEE AT AVERAGE SALE RATE OF THAT CONCERN. THERE IS THUS RATE DIFFERENCE OF ABOUT RS.3,865/- PER CARAT ON SA LES MADE TO THE ASSESSEE. THE TOTAL PURCHASES FROM M/S. SANGHVI EXPORTS WA S 57953.10 CARAT OF DIAMONDS AND, THEREFORE, THE PROFI T TRANSFERRED FROM M/S. SANGHVI EXPORTS TO THE ASSESSEE WOULD BE RS.3865 X 57 953.10 WHICH COMES TO ABOUT RS.22.39 CRORES. THE PROFIT TRANSF ERRED TO THE ASSESSEE COMPUTED ON THE BASIS OF AVERAGE RATE MAY NOT GI VE THE EXACT FIGURE. THEREFORE, IN OUR VIEW, PROFIT TRANSFE RRED HAS TO BE LIMITED TO THE EXCESS PROFIT SHOWN BY THE ASSESSEE COMPARED TO THE PROFIT COMPUTED AT THE NORMAL GP RATE OF 10% SHOWN BY THE ASSESSEE IN THE IMMEDIATE PRECEDING YEAR AS SHARP RISE IN GP RAT E HAS NOT BEEN EXPLAINED SATISFACTORILY. THE EXCESS PROFIT COMPUTED ON THE BASIS OF NORMAL GP RATE IS RS.4,98,18,823/-. THEREFORE, IN OUR VIEW, ADJUSTMENT OF RS.4,98,18,823/- MADE BY THE AO UNDER SECTION 10A(7) READ WITH SECTION 80IA(10) IS JUSTIFIED ON THE FACTS OF T HE CASE. WE, ITA NO.352 & 577/M/08 A.Y:04-05 28 THEREFORE, SET ASIDE THE ORDER OF CIT(A) ON THIS POIN T AND CONFIRM THE ORDER OF THE AO. 3.22 AS REGARDS THE TRANSFER OF PROFIT ON ACCOUNT OF L ABOUR CHARGES, THE LD. AR HAS ARGUED THAT PROVISIONS OF SECTION 80I(8) ARE NOT APPLICABLE AS SAME RELATE TO TRANSFER OF GOODS. HOWE VER THE LD. DR RIGHTLY POINTED OUT THAT SECTION 80IA(8) WOULD ALSO AP PLY TO TRANSFER OF SERVICES THEREFORE, IN CASE SERVICES ARE PROVIDED TO GROUP CONCERN, THE PROVISIONS WOULD APPLY. THE DETAILS OF EMPLOYEE COST A ND LABOUR CHARGES FOR THIS YEAR AS WELL AS IMMEDIATE PRECEDING AND IMMEDIATE SUCCEEDING YEAR HAVE BEEN GIVEN IN PARA 3.4 EARLIER. THE EMPLOYEE COST HAD GONE UP BY ABOUT 20% THIS YEAR BUT LABOUR CH ARGES HAVE DECLINED STEEPLY FROM RS.73.00 LACS TO ONLY RS.15.00 LACS THOUGH RAW MATERIAL CONSUMPTION HAS DECLINED ONLY BY 20%. THE ASSESSE E HAS EXPLAINED THAT EMPLOYEE COST WENT UP BECAUSE OF INCREASE IN NUMBER OF EMPLOYEES BUT DETAILS OF EMPLOYEES WAS NOT GIVEN BEF ORE THE AO. THE CLAIM OF OVERTIME WORK WAS ALSO NOT SUPPORTED BY AN Y EVIDENCE. THERE IS NO DISPUTE THAT GROUP CONCERN OF THE ASSESSEE I.E. SANGHAVI STAR WAS RUNNING A DESIGN CENTRE AT PRINCE ARCADE OUTSIDE SEEPZ WHERE EMPLOYEES OF THE ASSESSEE WERE ALSO WORKING. THE E MPLOYEE DETAILS OF THAT CENTRE WERE NOT GIVEN TO THE AO. TH OUGH THE ASSESSEE HAS CLAIMED THAT THEY HAD RECOVERED THE COST FROM SANGHV I STAR COMPLETE WORKING DETAILS ARE NOT GIVEN. FURTHER, TH E ASSESSEE HAD ITA NO.352 & 577/M/08 A.Y:04-05 29 STAFF SHARING ARRANGEMENTS IN RELATION TO ASSORTMENT ACTI VITY AT M/S. SANGHVI EXPORTS WHERE THERE IS STRONG POSSIBILITY OF TRA NSFER OF SERVICES OF THE STAFF OF THE ASSESSEE COMPANY. 3.23 WE ALSO NOTE THAT IN THE IMMEDIATE SUCCEEDING YEA R LABOUR CHARGES HAVE INCREASED FROM RS.15.00 LACS TO RS.75.00 LACS AND THE EMPLOYEE COST HAS ALSO INCREASED BY ABOUT 25% THOUGH THE CONSUMPTION OF RAW MATERIAL DECLINED SHARPLY. THE AO H AS TREATED THE INCREASE IN EMPLOYEE COST AS NORMAL INCREASE DUE TO ANNUAL INCREMENTS WHICH APPEARS REASONABLE AS SIMILAR INCREASE IS TH ERE IN THE SUBSEQUENT YEAR ALSO WHEN THE CONSUMPTION OF RAW MAT ERIAL DECLINED. ONLY IN THIS ASSESSMENT YEAR, LABOUR CHARGES ARE LOWEST WHEREAS IN THE IMMEDIATE PRECEDING YEAR AND IN THE SUB SEQUENT YEAR, IS VERY HIGH. THE ASSESSEE, AS POINTED OUT EARLIER, HAD N OT GIVEN FULL DETAILS. UNDER THESE CIRCUMSTANCES IT IS QUITE REASONABLE TO CONCLUDE THAT THE ASSESSEE HAD TRANSFERRED THE SERVICES OF EMPLOYEES TO THE GROUP CONCERNS. THE VALUE OF SUCH TRANSFER OF SERVICES HAS T O BE COMPUTED ON THE BASIS OF CONSUMPTION OF RAW MATERIAL. S INCE RAW MATERIAL CONSUMPTION HAD DECLINED THIS YEAR BY ABOUT 2 0% , THE LABOUR CHARGES WERE EXPECTED TO BE AROUND RS.58.00 LACS THIS YEAR AGAINST ONLY RS.15.00 LACS SHOWN. THEREFORE, IN OUR VIEW, THE VALUE OF SERVICES TRANSFERRED COMES TO AROUND RS.43.00 LACS. THE TRA NSFER ITA NO.352 & 577/M/08 A.Y:04-05 30 VALUE ADOPTED BY AO WAS RS.60.00 LACS WHEREAS CIT(A) HAS TAKEN THE VALUE AT 20 LACS. IN OUR VIEW, ON THE FACTS OF THE CASE IT WILL BE REASONABLE TO ESTIMATE VALUE AT RS.40.00 LACS. ACCORDINGLY , WE CONFIRM THE ADJUSTMENT OF RS.40.00 LACS TO THE PROFIT ON ACCOUNT OF LABOUR CHARGES. 4. THE SECOND DISPUTE WHICH IS RELEVANT ONLY TO APPEAL O F THE REVENUE IS REGARDING DISALLOWANCE OF RS.85,447/-, IN RE SPECT OF DELAYED PAYMENT OF PF/ESIC. THE AO NOTED THAT EMPL OYEES CONTRIBUTION IN RESPECT OF PF & ESIC WAS RS.85,447/- WHI CH HAD BEEN PAID AFTER DUE DATE. HE, THEREFORE, DISALLOWED THE SA ME. IN APPEAL CIT(A) HELD THAT EMPLOYEES CONTRIBUTION PAID WITHIN T HE GRACE PERIOD HAS TO BE ALLOWED AND THOSE AFTER GRACE PERIOD HAVE TO BE DISALLOWED. AGGRIEVED BY THE SAID DECISION REVENUE IS IN APPEAL. 4.1 WE HAVE HEARD BOTH THE PARTIES, PERUSED THE RECORD S AND CONSIDERED THE MATTER CAREFULLY. UNDER INTERNAL INSTRUCT IONS OF PF AND ESIC AUTHORITIES, A GRACE PERIOD OF 5 DAYS HAS BEEN, AL LOWED FROM THE DUE DATE FOR MAKING PAYMENTS AND THEREFORE, EMPLOYEE S CONTRIBUTION PAID WITHIN GRACE PERIOD HAS TO BE ALLOWED AS DEDUCTION UNDER SECTION 36(VA). WE, THEREFORE, SEE NO INFIRMITY IN THE ORDE R OF CIT(A) AND THE SAME IS, THEREFORE, UPHELD. ITA NO.352 & 577/M/08 A.Y:04-05 31 5. THE THIRD DISPUTE WHICH IS RELEVANT ONLY TO THE APP EAL OF THE ASSESSEE IS REGARDING NON ADJUSTING PROFIT OF THE BUSINESS BY THE EXPENSES DISALLOWED UNDER SECTION 43B, 40A(7) AND 37(1). THE AO HAD MADE FOLLOWING DISALLOWANCE WHICH HAD NOT BEEN CONSI DERED FOR THE PURPOSE OF SECTION 10A :- EX-GRATIA RS.11,10,719/- UNPAID BONUS RS.7,47,341/- UNPAID LEAVE ENCASHMENT RS.1,92,138/- UNPAID SALES-TAX RS .23,868/- PROVISIONS OF GRATUITY U/S.40A(7) RS.2,90,553/- FINES & PENALTIES RS.4,602/- TOTAL : RS.23,69,221/ RS.23,69,221/ RS.23,69,221/ RS.23,69,221/- -- - THE AO HELD THAT THE AMOUNTS ADDED AS MENTIONED ABOV E WOULD NOT QUALIFY FOR DEDUCTION UNDER SECTION 10A AS DEDUCTION WA S ALLOWABLE ONLY IN RESPECT OF PROFIT DERIVED FROM EXPORT OF ARTI CLE OR THINGS OR COMPUTER SOFTWARE AND THE ADDITIONS MADE WERE NOT THE PROFIT DERIVED FROM EXPORT. IN APPEAL CIT(A) AGREED THAT ENHANCEME NT OF INCOME BY DISALLOWANCE OF EXPENSES UNDER THE STATUTORY PROVISIONS WA S NOT FROM EXPORTS AS THE SOURCE OF ADDITIONAL PROFIT WAS STATUTOR Y DISALLOWANCE. HE, THEREFORE, CONFIRMED THE ACTION OF THE AO. 5.1 WE HAVE HEARD BOTH THE PARTIES, PERUSED THE RECORD S AND CONSIDERED THE MATTER CAREFULLY. THE DEDUCTION UNDER SEC TION 10A IS ALLOWABLE ON THE BASIS OF PROFIT OF THE BUSINESS OF THE UNDERTAKING. THE PROFIT OF THE BUSINESS IS REFLECTED IN THE P&L ACCOUNT IN WHICH THE ITA NO.352 & 577/M/08 A.Y:04-05 32 ASSESSEE CLAIMS VARIOUS EXPENSES. IN CASE, ANY EXPENSES ARE DISALLOWED UNDER THE PROVISIONS OF THE STATUTE OR OTHER WISE FOR WANT OF EVIDENCE, THIS WOULD ONLY GO TO INCREASE PROFIT OF THE BUSINESS. THEREFORE, IN OUR VIEW, IF ANY ADDITION HAS BEEN MAD E TO THE PROFIT OF BUSINESS BY WAS OF DISALLOWANCE OF EXPENSES, THE AMOUNT AD DED WILL VERY MUCH FORM PART OF THE PROFIT OF THE BUSINESS AND T HEREFORE, IT HAS TO BE CONSIDERED WHILE WORKING OUT DEDUCTION UNDER SECTI ON 10A AS PER METHOD PRESCRIBED IN THE SECTION. WE ARE, THEREFORE, U NABLE TO SUSTAIN THE ORDER OF CIT(A) ON THIS POINT. THE ORDER OF CI T(A) IS THEREFORE, SET ASIDE AND THE CLAIM OF THE ASSESSEE IS ALLOWED. 6. THE FOURTH DISPUTE WHICH IS AGAIN IS RELEVANT ONLY TO THE APPEAL OF THE ASSESSEE IS REGARDING REDUCTION OF REWINDING CHARGE S FROM THE PROFIT OF THE BUSINESS WHILE COMPUTING DEDUCTION UNDER S ECTION 10A. THE LD. AR FOR THE ASSESSEE AT THE TIME OF HEARING OF T HE APPEAL DID NOT PRESS THIS GROUND AND, THEREFORE, THE GROUND RAISED BY THE ASSESSEE IS DISMISSED AS NOT PRESSED. 7. THE FIFTH DISPUTE WHICH IS ALSO RELEVANT ONLY TO TH E APPEAL OF THE ASSESSEE IS REGARDING THE INTEREST ON DEPOSITS TREATED BY T HE AO AS INCOME FROM OTHER SOURCES. THE ASSESSEE IN THE P&L ACCOUNT HAD CREDITED THE INTEREST INCOME OF RS.19,76,482/- ON ACCOUNT OF BANK AND RS.33,250/- ON ACCOUNT OF OTHER PARTIES. THE ASSESSEE HAD TREATED ITA NO.352 & 577/M/08 A.Y:04-05 33 INTEREST INCOME AS BUSINESS INCOME ON THE GROUND THAT THE INTEREST INCOME HAD BEEN RECEIVED FROM DEPOSITS WHICH HAD BEEN USE D AS COLLATERAL SECURITY FOR THE PURPOSE OF BUSINESS. THE AO D ID NOT ACCEPT THE CLAIM AND ASSESSED THE INCOME AS INCOME FROM OTHER SOURCE S. IN APPEAL, CIT(A) HAD CONFIRMED THE ORDER OF AO, AGGRIE VED BY WHICH THE ASSESSEE IS IN APPEAL BEFORE TRIBUNAL. 7.1 THE LD. AUTHORISED REPRESENTATIVE FOR THE ASSESSEE SUB MITTED THAT HE WAS NOT PRESSING THE ISSUE REGARDING TREATMENT O F INTEREST INCOME AS INCOME FROM OTHER SOURCES. IT WAS SUBMITTED BY H IM THAT ONLY GRIEVANCE OF THE ASSESSEE WAS THAT AO HAD NOT TAKEN THE NET INTEREST INCOME AFTER DEDUCTING THE EXPENSES INCURRED. HE , THEREFORE, PRESSED THE ISSUE OF NETTING. THE LD. DR PLACED RELIAN CE ON THE ORDERS OF AUTHORITIES BELOW. 7.2 WE HAVE PERUSED THE RECORDS AND CONSIDERED THE RIVAL CONTENTIONS CAREFULLY. THE ONLY ISSUE RAISED IS REGARDING NETTING OF INTEREST INCOME WHICH HAS BEEN TREATED BY THE AUTHORIT IES BELOW AS INCOME FROM OTHER SOURCES. IT IS SETTLED LEGAL POSITION T HAT IN CASE SOME EXPENSES HAVE BEEN INCURRED FOR EARNING OF INTEREST INCOME, DEDUCTION HAS TO BE ALLOWED UNDER SECTION 57(III). WE, THEREFORE, SEE NO REASON IN NOT ACCEDING TO THE CLAIM OF THE ASSESSEE. W E, THEREFORE, RESTORE THIS ISSUE TO THE FILE OF AO WITH THE DIRECTION TO EXAMINE THE ITA NO.352 & 577/M/08 A.Y:04-05 34 CLAIM OF THE ASSESSEE AND ALLOW THE EXPENSES HAVING NEXUS WITH EARNING OF INTEREST INCOME. THE GROUND IS, THEREFORE, ALLOWED FOR STATISTICAL PURPOSES. 8. IN THE RESULT, BOTH THE APPEALS ARE PARTLY ALLOWED . ORDER PRONOUNCED IN THE OPEN COURT ON 30.11.2011. SD/- SD/- (R.S. PADVEKAR) (RAJENDRA SINGH ) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI, DATED: 30/11/2011. JV. COPY TO: THE APPELLANT THE RESPONDENT THE CIT, CONCERNED, MUMBAI THE CIT(A) CONCERNED, MUMBAI THE DR BENCH TRUE COPY BY ORDER DY/ASSTT. REGISTRAR, ITAT, MUMBAI.