KAYBEE P.LTD, MUMBAI V. ITO 8(2)(2), MUMBAI

ITA 3749/MUM/2014

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 92588 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 3 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 29-05-2015
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: K
• Next Hearing Date: 19-01-2015
• Assessment Year: 2008-2009
• Appeal Filed On: 26-05-2014
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: N PADMANBAN
• Assessee Lawyers: PARDIWALA
• Keywords: Transfer pricing; Business expenditure; Opportunity of being heard; International transaction; Rule of consistency; Additional evidence
• Section: 92C; 143(3); 92B; 142(1); 92A; 92E; 37(1); 92

Judgement Text

K IN THE INCOME TAX APPELLATE TRIBUNAL K BENCH, MUMBAI BEFORE SHRI VIJAY PAL RAO, JM AND SHRI RAJENDRA, ACCOUNTANT MEMBER ./ I.T.A. NO.3749/MUM/ 2014 ( / ASSESSMENT YEAR : 2008-09 KAYBEE PRIVATE LIMITED, 301, A WING, SOLARIS -1, SAKI VIHAR ROAD, ANDHERI (E), MUMBAI 400 072. / VS. INCOME TAX OFFICER 8(2)2, MUMBAI. ./ PAN : AAACK1715H ( / APPELLANT ) .. ( / RESPONDENT ) A PPELLANT BY SHRI PARDIWALA & SHRI MADHUR AGARWAL RESPONDENT BY SHRI N. PADMANBAN / DATE OF HEARING : 21-05-2015 / DATE OF PRONOUNCEMENT :29.05.2015 [ !' / O R D E R PER VIJAY PAL RAO, J.M . : THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST THE ORDER DATED 26-03-2014 OF LD. CIT(A)- 15, MUMBAI FOR A.Y. 2008- 09. 2. THE ASSESSEE HAS RAISED THE FOLLOWING GROUNDS OF APPEAL:- 1. UNDER THE FACTS AND CIRCUMSTANCES OF APPELLANT' S CASE AND IN LAW, THE LEARN COMMISSIONER OF INCOME-TAX (APPEAL)-15 [' CIT(A)'] GROSSLY ERRED IN UPHOLDING ADDITION OF RS.1, 13,21,9021- MA DE BY THE LD. ASSESSING OFFICER (AO') U/S 92 OF INCOME-TAX ACT, 1 961 (ACT') WHEN THE APPELLANT DOES NOT FALL WITHIN THE AMBIT OF SAID SE CTION 92 OF THE ACT. 2. UNDER THE FACTS AND CIRCUMSTANCES OF APPELLANT'S CASE AND IN LAW, THE LD. CIT(A) GROSSLY ERRED IN HOLDING THAT THE OR DER OF LD. AO U/S 143(3) IS LEGAL AND VALID EVEN THOUGH LD. AO DID NO T ISSUE THE ITA 3749/MUM /14 2 MANDATORY WRITTEN SHOW CAUSE NOTICE AS PER 2ND PROV ISO TO SECTION 92C(3) OF THE ACT. 2.1 THE LD. CIT(A) GROSSLY ERRED IN HOLDING THAT LD . AO HAS COMPLIED WITH THE PROVISION OF 2ND PROVISO TO SECTI ON 92C(3) IN THE IMPUGNED ASSESSMENT PROCEEDING IN THE APPELLANT 'S CASE. 2.2 THE LD. CIT(A) GROSSLY ERRED IN HOLDING THAT 2N D PROVISO TO SECTION 92C(3) DOES NOT MANDATE SERVICE OF SPECIFIC WRITTEN SHOW CAUSE NOTICE TO ASSESSEE. 2.3 THE LD. CIT(A) GROSSLY ERRED IN HOLDING THAT 2N D PROVISO TO SECTION 92C(3) MERELY REQUIRES AN 'OPPORTUNITY OF B EING HEARD' TO BE GIVEN TO ASSESSEE AND NOTHING BEYOND THAT. 2.4 THE LD. CIT(A) GROSSLY ERRED IN HOLDING IN PARA 4.6(IV) OF HIS APPELLATE ORDER THAT THE LEGAL INFIRMITY COMMITTED BY LD. AO ON ACCOUNT OF FAILURE OF THE LD. AO TO AFFORD THE APPE LLANT THE OPPORTUNITY, WHICH IS MANDATORY IN TERMS OF SECTION 92C(3) OF THE ACT, CAN BE CURED BY THE CIT(A) BY ADMITTING TH E ADDITIONAL EVIDENCES AND THEREBY THIS WOULD NOT VIOLATE AND MA KE THE ASSESSMENT PROCEEDINGS INVALID. 2.5 THE LD. CIT(A) GROSSLY ERRED IN APPLYING THE PR OVISIONS OF SECTION 29288 OF THE ACT TO THE FACTS OF THE PRESEN T CASE OF THE APPELLANT WHEN THE APPELLANT HAD NO OPPORTUNITY AND OCCASION TO RAISE THE SUBJECT OBJECTION IN THE COURSE OF ASS ESSMENT PROCEEDING BECAUSE THE CAUSE OF ACTION HAS ITSELF A RISEN UPON THE COMPLETION OF ASSESSMENT ON PASSING OF IMPUGNED ORD ER UNDER SECTION 143(3). 3. UNDER THE FACTS AND CIRCUMSTANCES OF APPELLANT'S CASE AND IN LAW, THE LD. CIT(A) GROSSLY ERRED IN HOLDING THE APPELLA NT (NAMELY, KAYBEE PRIVATE LIMITED) AND KAYBEE EXIM PTE LIMITED SINGAP ORE AS ASSOCIATED ENTERPRISES CAES) IN TERMS OF SECTION 92A(1) AS WEL L AS IN TERMS OF SECTION 92A(2)U) OF THE ACT. 3.1 CONTRARY TO THE FACTS ON RECORD, THE LD. CIT (A ) GROSSLY ERRED IN HOLDING THAT MR. VIKRAM CHAND INDIRECTLY HOLDS M ORE THAN 26% SHAREHOLDING IN APPELLANT THROUGH MR. GOVIND KARUNAKARAN. 3.2 THE LD. CIT(A) GROSSLY ERRED IN HOLDING THAT JU ST BECAUSE THERE IS ONE COMMON DIRECTOR IN KAYBEE PRIVATE LIMI TED AND KAYBEE EXIM PTE LIMITED SINGAPORE DURING THE RELEVA NT YEAR, THESE TWO ARE AES WITHIN THE MEANING OF THAT TERM I N SECTION 92A( 1) OF THE ACT. ITA 3749/MUM /14 3 3.3 CONTRARY TO THE FACTS ON RECORD, THE LD. CIT(A) GROSSLY ERRED [N HOLDING THAT THE MANAGEMENT AND CONTROL OF THE A PPELLANT AS WELL AS OF KAYBEE EXIM PTE LIMITED SINGAPORE IS COM MON SUCH THAT THEY ARE AES WITHIN THE MEANING OF SECTION 92A (1) OF THE ACT. 3.4 CONTRARY TO THE FACTS ON RECORD, THE LD. CIT(A) GROSSLY ERRED IN HOLDING THAT THE APPELLANT HAS NOT DENIED THAT M R. DEEPAK GURNANI WAS NOT A COMMON DIRECTOR OF APPELLANT AND KAYBEE EXIM PTE LIMITED SINGAPORE. 3.5 THE LD. CIT(A) GROSSLY ERRED IN NOT APPRAISING AND APPRECIATING THE LEGAL POSITION EMERGING FROM THE A PPELLANTS' AUTHENTICATED AND RELEVANT DOCUMENTARY EVIDENCES FI LED BEFORE HIM FOR THE RELEVANT PERIOD IN THE COURSE OF APPELL ATE PROCEEDINGS REGARDING THE SHAREHOLDING AND DIRECTORSHIP OF THE APPELLANT. 4. UNDER THE FACTS AND CIRCUMSTANCES OF APPELLANT'S CASE AND IN LAW, THE LD. CIT(A) GROSSLY ERRED IN UPHOLDING THE ARM'S LENGTH BROKERAGE RATE FOR YARN PRODUCT AT 2% AS DETERMINED BY LD. AO AS AGAINST 0.75% ACTUALLY RECEIVED BY THE APPELLANT. 4.1 THE LD. CIT(A) GROSSLY ERRED IN NOT APPRECIATIN G THAT THE COMPARABLE INSTANCE OF 2% BROKERAGE RATE ADOPTED BY LD. AO CANNOT BE TAKEN AS A COMPARABLE INSTANCE BECAUSE IT S APPELLANT'S OWN ALLEGED INTERNATIONAL TRANSACTION W ITH ITS ALLEGED AE AND HENCE IT DOES NOT REPRESENT AN ARM'S LENGTH PRICE AS DEFINED U/S 92F(II) OF THE ACT. 4.2 THE LD. CIT(A) GROSSLY ERRED IN REJECTING THE M ARKET DRIVEN UNCONTROLLED COMPARABLE INSTANCES OF YARN BROKERAGE RATES RANGING FROM 0.5% TO 0.75% OF SHIPMENT VALUE FURNIS HED BY THE APPELLANT. 4.3 THE LD. CIT (A) GROSSLY ERRED IN HOLDING THAT L D. AO CAN DETERMINE ARM'S LENGTH PRICE BASED ON ESTIMATION AN D BEST JUDGMENT WITHOUT APPRECIATING THAT THE PROVISIONS O F SECTION 92C ALSO APPLIES FOR COMPUTATION OF ARM'S LENGTH PRICE BY LD. AO IN TERMS OF SECTION 9ZC(3) OF THE ACT AND THAT THE LD. AO IN THE PRESENT CASE OF APPELLANT COMPLETELY IGNORED THESE PROVISIONS WHILE DETERMINING ALP OF YARD BROKERAGE RATE AT 2%. 5. UNDER THE FACTS AND CIRCUMSTANCES OF APPELLANT'S CASE AND IN LAW, THE LD. CIT (A) GROSSLY ERRED IN UPHOLDING THE DISA LLOWANCE OF RS.1, 70,012/- MADE BY LD. AO IN RESPECT OF SOCIETY CHARG ES AND PROPERTY TAX PAID BY THE APPELLANT FOR THE PREMISES FROM WHERE I T CONDUCTS ITS BUSINESS. ITA 3749/MUM /14 4 3. GROUND NO. 1 TO 3 ARE REGARDING THE QUESTION WHE THER THE ASESSEE AND KAYBEE EXIM PTE LIMITED SINGAPORE ARE ASSOCIATED EN TERPRISE (AES) IN TERMS OF SECTION 92A(1)/92A(2)(I) OF THE INCOME TAX ACT, 1961. 4. THE ASSESSEE IS ENGAGED IN THE BUSINESS OF RUNNI NG BUSINESS CENTRE BY PROVIDING AMENITIES. THE ASSESSEE HAS ALSO RECEIVED SERVICE CHARGES/COMMISSION CHARGES FOR MAKING PURCHASE OF T EXTILES, YARNS ETC ON BEHALF OF KAYBEE EXIM PTE LIMITED, SINGAPORE. DURIN G THE COURSE OF ASSESSMENT PROCEEDINGS, THE A.O. NOTED FROM THE FIN ANCIAL STATEMENT THAT THE ASSESSEE HAS RECEIVED A SUM OF RS. 77,95,693/- AS S ERVICE CHARGES. THE ASSESSEE STATED THAT THIS SUM HAS BEEN RECEIVED FRO M KAYBEE EXIM PTE LIMITED, SINGAPORE FOR MAKING PURCHASE/PROCUREMENT OF TEXTILE AND YARN. THE A.O. VIDE NOTICE DATED 3-12-2010 U/S 142(1) OF THE ACT ASKED THE ASSESSEE TO FURNISH CERTAIN DETAILS AND AS TO WHY T HE ASSESSEE AND KAYBEE EXIM PTE LIMITED, SINGAPORE ARE NOT AES WITHIN THE MEANING OF SECTION 92A OF THE ACT. THE A.O. FOUND THAT AS PER THE WEBSITE OF KAYBEE GROUP, M/S KAYBEE EXIM PTE LIMITED, SINGAPORE IS BASED IN SINGAPORE A ND AS PER THEIR VARIOUS LOCATIONS, ONE OF THE LOCATIONS IS SHOWN IN INDIA A ND THE ASSESSEE IS A REPRESENTATIVE COMPANY OF KAYBEE GROUP. IT WAS FURT HER FOUND THAT MR. KUMAR CHAND IS THE CHAIRMAN, MR. VIKRAM CHAND, MANA GING DIRECTOR, MR. SURESH MELWANI, VICE CHAIRMAN, MR. DEEPAK GURNANI, DIRECTOR, MR. GOVIND KARUNAKARAN, CHIEF OPERATING OFFICE AND MR. NAGENDR A, FINANCE DIRECTOR OF KAYBEE EXIM PTE LIMITED, SINGAPORE. AT THE SAME TIM E, MR. GOVIND KARUNAKARAN IS ONE OF THE DIRECTORS OF THE ASSESSEE COMPANY AND ALSO HOLDING 99.9% OF THE SHARE HOLDING OF THE ASSESSEE COMPANY. THE A.O. ALSO EXAMINED THE RECORD FILED BEFORE THE R.O.C., MUMBAI AND NOTED THAT APART FROM MR. GOVIND KARUNAKARAN, MR. DEEPAK GURNANI AND MR. RAJESH PILLAI ARE ALSO DIRECTORS OF THE ASSESSEE COMPANY. THE ASSESS EE REPLIED TO THE NOTICE VIDE ITS LETTER DATED 14-12-2010 AND SUBMITTED THAT THE ASSESE AND KAYBEE EXIM PTE LIMITED, SINGAPORE DO NOT FALL WITHIN THE AMBIT OF SECTION 92A OF THE ITA 3749/MUM /14 5 ACT. AFTER CONSIDERING THE LIST OF DIRECTORS SINCE ITS INCEPTION, THE A.O. HELD THAT THE ASSESSEE AND KAYBEE EXIM PTE LIMITED, SING APORE ARE AES IN TERMS OF SECTION 92A OF THE ACT. TO ARRIVE AT THE CONCLUSION THAT THE ASSESSEE AND KAYBEE EXIM PTE LIMITED, SINGAPORE ARE AES, THE A.O . HAS REFERRED VARIOUS INFORMATION OBTAINED FROM THE WEBSITE OF THE KAYBEE GROUP AS WELL AS THE FACT THAT MR. VIKRAM KUMAR CHAND THE PROMOTER OF THE ASS ESSEE COMPANY TRANSFERRED HIS SHARE HOLDING IN FAVOUR MR. GOVIND KARUNAKARAN IN THE YEAR 2006. MR. VIKRAM KUMAR CHAND IS ALSO MANAGING DIREC TOR OF KAYBEE EXIM PTE LIMITED, SINGAPORE. APART FROM THIS, MR. GOVIND KARUNAKARAN IS DIRECTOR IN BOTH THE COMPANIES, THEREFORE, THE A.O. HELD THA T THESE TWO COMPANIES ARE AES IN TERMS OF SECTION 92A(1) AS WELL AS 92A(2) OF THE ACT. THE ASSESSEE CHALLENGED THE ACTION OF THE A.O. BEFORE THE LD. CI T(A) AND CONTENDED THAT THE ASSESSEE AND KAYBEE EXIM PTE LIMITED, SINGAPORE ARE NOT AES IN TERMS OF SECTION 92A OF THE ACT. IT WAS CONTENDED BEFORE THE LD. CIT(A) THAT KAYBEE EXIM PTE LIMITED, SINGAPORE DOES NOT HOLD ANY DIREC T OR INDIRECT SHARE HOLDING IN ASSESSEE COMPANY AND NEITHER THE ASSESSE E HOLDING ANY SHARE IN KAYBEE EXIM PTE LIMITED, SINGAPORE. MR. GOVIND KARU NAKARAN GOT 99.9% SHARE IN THE ASSESSEE COMPANY AND ONE SHARE IS HELD BY MR. DEEPAK GURNANI BUT MR. GOVIND KARUNAKARAN DOES NOT HOLD ANY SHAREH OLDING IN KAYBEE EXIM PTE LIMITED, SINGAPORE, THEREFORE, THERE IS NO DIRE CT OR INDIRECT SHAREHOLDING BY THE ASSESSEE COMPANY AND KAYBEE EXIM PTE LIMITED , SINGAPORE IN EACH OTHER CARRYING 26% VOTING POWER. IN FACT, THE ASSES SEE HAS ADVANCED THE ARGUMENT BEFORE THE LD. CIT(A) THAT NONE OF THE CON DITIONS PRESCRIBED UNDER CLAUSE (A) TO (M) OF SUB SECTION (2) OF SECTION 92A ARE SATISFIED, THEREFORE, THE ASSESSEE AND KAYBEE EXIM PTE LIMITED, SINGAPORE DOE S NOT FALL UNDER THE AMBIT OF AES AS PER SECTION 92A OF THE ACT. THE LD . CIT(A) DID NOT AGREE WITH THE CONTENTION OF THE ASSESSEE AND CONFIRMED WITH T HE VIEW OF THE A.O. BY HOLDING THAT THE ASSESSEE AND KAYBEE EXIM PTE LIMIT ED, SINGAPORE ARE AES AS PER PROVISIONS OF SECTION 92A OF THE ACT. ITA 3749/MUM /14 6 5. BEFORE US, SHRI P. PARDIWALA, THE LD. SR. COUNSE L FOR THE ASSESSEE HAS SUBMITTED THAT THE CONDITIONS AS PRESCRIBED UNDER S .S. (2) OF SECTION 92A ARE NOT SATISFIED, THEREFORE, THE ASSESSEE AND KAYBEE E XIM PTE LIMITED, SINGAPORE DO NOT FALL UNDER THE AMBIT OF AES AS PER THE PROVI SIONS OF SECTION 92A OF THE ACT. THE MAIN EMPHASIS OF THE ARGUMENT OF THE LD. S R. COUNSEL IS THAT IN ORDER TO HOLD THE TWO ENTERPRISES AS AES, THE CONDITION P RESCRIBED UNDER S.S (2) OF SECTION 92A ARE TO BE SATISFIED. THUS AN ENTERPRIS E CAN BE AN AE OF THE OTHER AS PER THE TERMS OF SECTION 92A(1) ONLY WHEN ANY OF THE CONDITIONS PRESCRIBED UNDER CLAUSE (A) TO (M) OF S.S. (2) OF SECTION 92A ARE SATISFIED. HE HAS REFERRED MEMORANDUM OF EXPLANATION OF FINANCE BILL 2002 REPO RTED IN 254/190 AND SUBMITTED THAT IT HAS BEEN CLARIFIED IN THE MEMORAN DUM THAT THE MERE FACT OF PARTICIPATION BY ONE ENTERPRISE IN THE MANAGEMENT O R CONTROL OR CAPITAL OF OTHER ENTERPRISE OR THE PARTICIPATION OF ONE OR MOR E PERSON IN THE MANAGEMENT OR CONTROL OR CAPITAL OF BOTH ENTERPRISE S SHALL NOT MAKE THEM AES, UNLESS THE CRITERIA SPECIFIED IN S.S. (2) ARE FULFILLED. THUS, THE LD. SR. COUNSEL HAS CONTENDED THAT THE CONDITION STIPULATED UNDER CLAUSE (A) & (B) OF S.S. (1) OF SECTION 92A HAVE TO BE READ IN CONJECTU RE WITH THE CRITERIA PRESCRIBED IN CLAUSE (A) TO (M), S.S. (2) OF SECTIO N 92A. THE LD. SR. COUNSEL HAS ASSERTED THAT POST AMENDMENT OF SECTION 92A VIDE FI NANCE ACT, 2002, THE MEANING OF AE AS PER S.S. (1) OF SECTION 92A IS SUB JECT TO THE FULFILLMENT OF THE CRITERIA SPECIFIED IN S.S. (2) OF SECTION 92A. THE LD. SR. COUNSEL HAS REFERRED TO THE SHAREHOLDING OF THE ASSESSEE AS WELL AS KAYBEE EXIM PTE LIMITED, SINGAPORE AND SUBMITTED THAT THERE IS NO COMMON SHA REHOLDING OF THESE TWO COMPANIES, THEREFORE, NONE OF THE CRITERIA PROVIDED UNDER S.S. (2) OF SECTION 92A ARE FULFILLED. THE LD. SR. COUNSEL HAS REFERRE D TO VARIOUS CLAUSES OF S.S. (2) OF SECTION 92A AND SUBMITTED THAT THE REQUIREMENT O F TWO ENTERPRISES DEEM TO BE AES HAS BEEN SPECIFIED IN THESE CLAUSES AND, THE REFORE, THESE SPECIFIC CRITERIA ARE REQUIRED TO BE FULFILLED. IN THE CASE OF THE ASSESEE, NONE OF THE ENTERPRISES HOLD DIRECT OR INDIRECT SHARE CARRYING NOT LESS THAN 26% OF VOTING POWER IN THE OTHER ENTERPRISE. SIMILARLY, THERE IS NO LOAN, ADVANCE OR ANY ITA 3749/MUM /14 7 GUARANTEE FURNISHED BY EITHER OF THE ENTERPRISES TO THE OTHER ENTERPRISE. EXCEPT ONE DIRECTOR, WHO IS IN BOTH THE COMPANIES, THE REQUIREMENT OF MORE THAN HALF OF THE BOARD OF DIRECTORS OR MEMBER OF TH E GOVERNING BOARD OR ONE MORE EXECUTIVE DIRECTOR OR EXECUTIVE MEMBER OF THE GOVERNING BOARD OF ONE ENTERPRISE HAS BEEN APPOINTED BY THE OTHER ENTERPRI SES ARE NOT FULFILLED. THE LD. SR. COUNSEL HAS SUBMITTED THAT THE AUTHORITIES BELOW HAD APPLIED CLAUSE (J) OF S.S. (2) OF SECTION 92A TO TREAT THE ASSESSEE AN D KAYBEE EXIM PTE LIMITED, SINGAPORE TO BE AES. HOWEVER, THE CONTROL OF THESE COMPANIES IS NOT IN THE HANDS OF ONE INDIVIDUAL OR HIS RELATIVE OR JOINTLY BY SUCH INDIVIDUAL AND RELATIVE. THEREFORE, THE ASSESSEE AND KAYBEE EXIM P TE LIMITED, SINGAPORE DO NOT FALL WITHIN THE PURVIEW OF THE EXPRESSION AE AS PER SECTION 92A OF THE ACT. THE CONDITIONS STIPULATED UNDER S.S. (2) OF SE CTION 92A ARE TO BE FULFILLED MANDATORILY TO BRING THE TWO ENTERPRISES UNDER THE MEANING OF AE. THE LD. SR. COUNSEL HAS CONTENDED THAT IF THE PROVISIONS OF S.S. (1) AND S.S. (2) OF SECTION 92A ARE REGARDED AS INDEPENDENT PROVISIONS, THEN IT WOULD LEAD TO DRASTIC CONSEQUENCES WHEN THE CONDITIONS/CRITERIA P RESCRIBED UNDER S.S. (2) ARE NOT SATISFIED AND STILL THE TWO ENTERPRISES ARE TREATED AS AES AS PER THE CONDITION STIPULATED UNDER S.S. (1) OF SECTION 92A. THERE IS NO CRITERIA PRESCRIBED IN SUB-SECTION (1) AS TO HOW ONE ENTERPR ISE WOULD BE TREATED AS PARTICIPATING DIRECTLY OR INDIRECTLY OR THROUGH ONE OR MORE INTERMEDIARY IN THE MANAGEMENT OR CONTROL OR CAPITAL OF THE OTHER ENTER PRISE. THEREFORE, IN ORDER TO UNDERSTAND THE CORRECT MEANING OF THE TERM PART ICIPATION DIRECTLY OR INDIRECTLY IN THE MANAGEMENT OR CONTROL OR CAPITAL OF THE ENTERPRISE, THE CRITERIA PRESCRIBED IN S.S. (2) OF SECTION 92A HAVE TO BE TAKEN INTO CONSIDERATION. 6. ON THE OTHER HAND, THE LD. D.R. HAS SUBMITTED TH AT S.S. (2) OF SECTION 92A DOES NOT RESTRICT THE SCOPE OF S.S. (1) OF SECT ION 92A BUT IT EXPENDS THE SCOPE OF MEANING OF AES AND, THEREFORE, IF THE CRIT ERIA AS PRESCRIBED UNDER S.S. (2) ARE SATISFIED THEN, THE TWO ENTERPRISES WHICH M AY NOT BE THE AES AS PER ITA 3749/MUM /14 8 THE PROVISIONS OF S.S. (1) SHALL BE DEEMED TO BE AE . IN SUPPORT OF HIS CONTENTION, HE HAS RELIED UPON THE DECISION OF MUMB AI BENCH OF THIS TRIBUNAL IN THE CASE OF DIAGEO INDIA (P) LTD. VS. DCIT 47 SO T 252 (MUMBAI) AS WELL AS IN THE CASE OF SANCHEZ CAPITAL SERVICES P. LTD. VS. ITO [2012] 19 ITR (TRIB) 312 (MUMBAI). THE LD. D.R. ALSO RELIED UPON THE OR DERS OF AUTHORITIES BELOW. 7. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AS WELL AS RELEVANT MATERIAL PLACED ON RECORD. THE LANGUAGE OF SECTION 92A(1) IS UNAMBIGUOUS AND DOES NOT LEAVE ANY SCOPE OF IMPORTING ANY MEANING OF EXP RESSION AE. THE QUESTION RAISED BEFORE US IS WHETHER THE MEANING OF EXPRESSION AE AS PER S.S. (1) OF SECTION 92A IS SUBJECTED TO S.S. (2) OF SECTION 92A. THE LD. SR. COUNSEL FOR THE ASSESSEE HAS ASSERTED THAT THE CRIT ERIA PRESCRIBED UNDER S.S. (2) ARE NECESSARILY BE FULFILLED FOR TWO ENTERPRISE S TO BE TREATED AS AES. FOR READY REFERENCE, WE QUOTE THE SECTION 92A UNDER:- 92A. MEANING OF ASSOCIATED ENTERPRISE.- (1) FOR THE PURPOSES OF THIS SECTION AND SECTIONS 92, 92B, 92C, 92D, 92E AND 92F, ASSOCIATED ENTERPR ISE, IN RELATION TO ANOTHER ENTERPRISE, MEANS AN ENTERPRISE (A) WHICH PARTICIPATES, DIRECTLY OR INDI RECTLY, OR THROUGH ONE OR MORE INTERMEDIARIES, IN T HE MANAGEMENT OR CONTROL OR CAPITAL OF THE OTHER ENTER PRISE; OR (B) IN RESPECT OF WHICH ONE OR MORE PERSONS WHO PAR TICIPATE, DIRECTLY OR INDIRECTLY, OR THROUGH ONE OR MORE INTERMEDIARIES, IN ITS MANAGEMENT OR CONTROL OR CAPITAL, ARE THE SAME PERSONS WHO PARTICIPATE, DIRECTLY OR INDIRECTLY, OR THROUGH ONE OR MORE INTERMEDIARIES, IN THE MANAGEMENT OR CONTROL OR CAPITAL OF THE OTHER ENTERPRISE. (2) FOR THE PURPOSES OF SUB-SECTION (1), TWO ENTERP RISES SHALL BE DEEMED TO BE ASSOCIATED ENTERPRISES IF, AT ANY TIME DURING THE PREVIOUS YEA R, (A) ONE ENTERPRISE HOLDS, DIRECTLY OR INDIRECTLY, S HARES CARRYING NOT LESS THAN TWENTY- SIX PER CENT OF THE VOTING POWER IN THE OTHER ENTERPRISE; OR (B) ANY PERSON OR ENTERPRISE HOLDS, DIRECTLY OR IND IRECTLY, SHARES CARRYING NOT LESS THAN TWENTY- SIX PER CENT OF THE VOTING POWER IN EACH OF SUCH EN TERPRISES; OR (C) A LOAN ADVANCED BY ONE ENTERPRISE TO THE OTHER ENTERPRISE CONSTITUTES NOT LESS THAN FIFTY- ONE PER CENT OF THE BOOK VALUE OF THE TOTAL ASSETS OF T HE OTHER ENTERPRISE; OR (D) ONE ENTERPRISE GUARANTEES NOT LESS THAN TEN PER CENT OF THE TOTAL BORROWINGS OF THE OTHER ITA 3749/MUM /14 9 ENTERPRISE; OR (E) MORE THAN HALF OF THE BOARD OF DIRECTORS OR MEM BERS OF THE GOVERNING BOARD, OR ONE OR MORE E XECUTIVE DIRECTORS OR EXECUTIVE MEMBERS OF THE GOVE RNING BOARD OF ONE ENTERPRISE, ARE APPOINTED BY THE OTHER ENTERPRISE; OR (F) MORE THAN HALF OF THE DIRECTORS OR MEMBERS OF T HE GOVERNING BOARD, OR ONE OR MORE OF THE EXECUTIVE DIRECTORS OR MEMBERS OF THE G OVERNING BOARD, OF EACH OF THE TWO ENTERPRISES ARE APPOINTED BY THE SAME PERSON OR PERSONS; OR (G) THE MANUFACTURE OR PROCESSING OF GOODS OR ARTIC LES OR BUSINESS CARRIED OUT BY ONE ENTERPRISE IS WHOLLY DEPENDENT ON THE USE OF KNOW-H OW, PATENTS, COPYRIGHTS, TRADE- MARKS, LICENCES, FRANCHISES OR ANY OTHER BUSINESS OR COMME RCIAL RIGHTS OF SIMILAR NATURE, OR ANY DATA, DOCUMENTATION, DRAWING OR SPECIFICATION RELATING TO ANY PATENT, INVENTION, MODEL, DESIGN, SECRET FORMULA OR PROCESS, OF WHICH THE OTHER ENTERPRISE IS THE OWNER OR IN RESPECT OF WHICH THE OTHER ENTERPRISE HAS EXCLUSIVE RIGHTS; OR (H) NINETY PER CENT OR MORE OF THE RAW MATERIALS AN D CONSUMABLES REQUIRED FOR THE MANUFACTURE OR PROCESSING OF GOODS OR ARTICLES CARRIED OUT BY O NE ENTERPRISE, ARE SUPPLIED BY THE OTHER ENTERPRISE, OR BY PERSONS SPECIFIED BY THE OTHER EN TERPRISE, AND THE PRICES AND OTHER CONDITIONS RELATING TO THE SUPPLY ARE INFLUENCED BY SUCH OTHER ENTERPRISE; OR (I) THE GOODS OR ARTICLES MANUFACTURED OR PROCESSED BY ONE ENTERPRISE, ARE SOLD TO THE OTHER ENTERPRISE OR TO PERSONS SPECIFIED BY THE OTHER ENT ERPRISE, AND THE PRICES AND OTHER CONDITIONS RELATING THERETO ARE INFLUENCED BY SUCH OTHER ENTER PRISE; OR (J) WHERE ONE ENTERPRISE IS CONTROLLED BY AN INDIVI DUAL, THE OTHER ENTERPRISE IS ALSO CONTROLLED BY SUCH INDIVIDUAL OR HIS RELATIVE OR JOINTLY BY SUCH INDIVIDUAL AND RELATIVE OF SUCH INDIVIDUAL; OR (K) WHERE ONE ENTERPRISE IS CONTROLLED BY A HINDU U NDIVIDED FAMILY, THE OTHER ENTERPRISE IS CONTROLLED BY A MEMBER OF SUCH HINDU UNDIVIDED FAMI LY OR BY A RELATIVE OF A MEMBER OF SUCH HINDU UNDIVIDED FAMILY OR JOINTLY BY SUCH MEMBER AN D HIS RELATIVE; OR (L) WHERE ONE ENTERPRISE IS A FIRM, ASSOCIATION OF PERSONS OR BODY OF INDIVIDUALS, THE OTHER ENTERPRISE HOLDS NOT LESS THAN TEN PER CENT INTERES T IN SUCH FIRM, ASSOCIATION OF PERSONS OR BODY OF INDIVIDUALS; OR (M) THERE EXISTS BETWEEN THE TWO ENTERPRISES, ANY R ELATIONSHIP OF MUTUAL INTEREST, AS MAY BE PRESCRIBED. 8. THE MEANING OF AES AS PROVIDED UNDER S.S. (1) OF SECTION 92A AND IF THE CONDITION PROVIDED IN CLAUSE (A) & (B) OF S.S. (1) ARE INDEPENDENTLY SATISFIED THEN THE TWO ENTERPRISES FOR THE PURPOSE OF SECTION 92B TO 92E OF THE ACT WILL BE TREATED AS AES. SUB SEC. (2) OF SECTION 92A IS A DEEMING FICTION AND THEREFORE, IT EXPENDS/ENLARGES THE SCOPE AND MEANIN G OF EXPRESSION AE PROVIDED UNDER S.S. (1) OF SECTION 92A. SINCE S.S. (2) IS A DEEMING FICTION, ITA 3749/MUM /14 10 THEREFORE, IT CAN BE APPLIED ONLY IN THE SPECIFIC F ACTS OF THE CASE WHERE ANY OF THE CONDITIONS STIPULATED IN THE CLAUSES OF THIS SU B SECTION ARE FULFILLED. IT HAS NO GENERAL APPLICATION IN RESPECT OF THE MEANING A E. EVEN OTHERWISE, S.S. (1) OF SECTION 92A DOES NOT BEGUN WITH THE SUBJECTI VE CLAUSE SUBJECT TO S.S. (2). THE LD. SR. COUNSEL FOR THE ASSESSEE HAS REFE RRED AND PLACED RELIANCE ON THE MEMORANDUM EXPLAINING THE PROVISIONS OF THE FIN ANCE BILL, 2002 WHEREBY S.S (2) OF SECTION 92A HAS BEEN AMENDED AND THE CLA RIFICATION IS PROVIDED AS UNDER:- THE EXISTING PROVISIONS CONTAINED IN SECTION 92A O F THE INCOME-TAX ACT TO PROVIDE AS TO WHEN TWO ENTERPRISES SHALL BE DEEM ED TO BE ASSOCIATED ENTERPRISES. . IT IS PROPOSED TO AMEND SUB-SECTION (2) OF THE SAID SECTION TO CLARIFY THAT THE MERE FACT OF PARTICIPATION BY ONE ENTERPRISE IN THE MANAGEMENT OR CONTROL OR CAPITAL OF THE OTHER ENTER PRISE, OR THE PARTICIPATION OF ONE OR MORE PERSONS IN THE MANAGEM ENT OR CONTROL OR CAPITAL OF BOTH THE ENTERPRISES SHALL NOT MAKE THEM ASSOCIATED ENTERPRISES, UNLESS THE CRITERIA SPECIFIED IN SUB-S ECTION (2) ARE FULFILLED. WE HAVE ALREADY DISCUSSED THAT S.S. (2) IS A DEEMIN G FICTION AND, THEREFORE, THE CONDITION/CRITERIA SPECIFIED THEREIN ARE REQUIRED T O BE FULFILLED. AS IT IS CLEAR FROM THE CRITERIA ENUMERATED IN CLAUSE (A) TO (M) O F S.S. (2) OF SECTION 92A THAT NONE OF THE CLAUSES PRESCRIBED ANY CRITERIA IN RESP ECT OF ONE ENTERPRISE PARTICIPATE DIRECTLY OR INDIRECTLY OR THROUGH ONE O R MORE INTERMEDIARIES IN THE MANAGEMENT WHICH IS ONE OF THE CONDITIONS PRESCRIBE D UNDER CLAUSES (A) & (B) OF S.S. (1) OF SECTION 92A OF THE ACT. THEREFORE, EVEN IF, FOR THE SAKE OF ARGUMENT IT IS PRESUMED THAT THE MEANING OF AE IN T ERMS OF S.S. (1) OF SECTION 92A HAS TO BE UNDERSTOOD AS PER THE CRITERIA PROVID ED IN CLAUSE (A) TO (M) OF S S. (2), THE CONDITION OF PARTICIPATING IN THE MANAG EMENT DIRECTLY OR INDIRECTLY OR ONE OR MORE INTERMEDIARIES AS PER CLAUSE (A) OF S.S. (1) DOES NOT GET EFFECTED BY THE CRITERIA PRESCRIBED UNDER S.S. (2). THE CO-O RDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF DIAGEO INDIA (P.) LTD. (SUP RA) HAD THE OCCASION TO CONSIDER THE MEANING OF AE AS PER SECTION 92A (1) & (2) IN PARA 10 & 11 AS UNDER:- ITA 3749/MUM /14 11 10. WE FIND THAT, IN TERMS OF THE PROVISIONS OF SE CTION 92A(L )(A), THE EXPRESSION 'ASSOCIATED ENTERPRISES' REFERS TO AN EN TERPRISES 'WHICH PARTICIPATES, DIRECTLY OR INDIRECTLY, OR THROUGH ON E OR MORE INTERMEDIARIES, IN THE MANAGEMENT OR CONTROL OR CAPITAL OF THE OTHE R ENTERPRISE'. THE SCOPE OF 'ASSOCIATED ENTERPRISES' IS EXPANDED FURTH ER BY SECTION 92A(I)(B), TAKING INTO ACCOUNT GROUP CONCERNS, AND IT IS PROVI DED THAT 'ASSOCIATED ENTERPRISES' COVERS AN ENTERPRISE 'IN RESPECT OF WH ICH ONE OR MORE PERSONS WHO PARTICIPATE, DIRECTLY OR INDIRECTLY. OR THROUGH ONE OR MORE INTERMEDIARIES, IN ITS MANAGEMENT OR CONTROL OR CAP ITAL, ARE THE SAME PERSONS WHO PARTICIPATE, DIRECTLY OR INDIRECTLY, OR THROUGH ONE OR MORE INTERMEDIARIES, IN THE MANAGEMENT OR CONTROL OR CAP ITAL OF THE OTHER ENTERPRISE.' IN EFFECT, THUS, WHEN SAME PERSONS PAR TICIPATE, DIRECTLY OR INDIRECTLY OR THROUGH AN INTERMEDIARY, IN THE MANAG EMENT OR CONTROL OR CAPITAL OF TWO OR MORE ENTERPRISES, SUCH ENTERPRISE S ARE REQUIRED TO BE TREATED AS 'ASSOCIATED ENTERPRISE'. INTERESTINGLY E VEN AS DEFINITION OF 'ASSOCIATED ENTERPRISES' HAS CRUCIAL REFERENCES TO 'PARTICIPATION IN MANAGEMENT OR CONTROL OR CAPITAL' AT SOME PLACES, T HE PRECISE SCOPE OF THIS EXPRESSION HAS NOT BEEN DEFINED UNDER THE PROV ISIONS OF THE INCOME- TAX ACT, AND IT HAS NOT COME UP FOR JUDICIAL ADJUDI CATION EITHER. THIS EXPRESSION HAS BEEN USED IN ARTICLE 9(1 OF OECD AND UN MODEL CONVENTIONS, BUT WE FIND NO ASSISTANCE FROM THE OEC D AND UN COMMENTARIES EITHER. ALL THAT THE OECD COMMENTARY S AYS ON THE SCOPE OF THIS EXPRESSION IS THAT IT REFERS TO 'PARENT AND SU BSIDIARY COMPANIES AND COMPANIES UNDER COMMON CONTROL'. THE TRUE TEST OF A SSOCIATED ENTERPRISE THUS IS CONTROL BY ONE ENTERPRISE OVER THE OTHER, O R CONTROL OF TWO OR MORE ASSOCIATED ENTERPRISES BY A COMMON INTERESTS, AND S UCH A CONTROL IS ESSENTIALLY AN EFFECTIVE CONTROL IN DECISION MAKING PROCESS. 11. IN OUR CONSIDERED VIEW, THEREFORE, THE DEFINITI ON OF ASSOCIATED ENTERPRISES IN SECTION 92A( 1 )(A) AND (B ) IS, WHA T CAN BE TERMED AS, BASIC RULE. IN PLAIN TERMS, THE BASIC RULE IS THAT WHEN O NE ENTERPRISE PARTICIPATES IN THE CONTROL OR MANAGEMENT OR CAPITA L OF THE OTHER ENTERPRISE (DIRECTLY OR INDIRECTLY OR THROUGH ONE O R MORE INTERMEDIARIES) OR WHEN PERSONS PARTICIPATING (DIRECTLY OR INDIRECTLY OR THROUGH ONE OR MORE INTERMEDIARIES) IN CONTROL OR MANAGEMENT OR CAPITAL OF TWO OR MORE ENTERPRISES ARE THE SAME, THE ENTERPRISES ARE SAID TO BE ASSOCIATED ENTERPRISE. THE EXPRESSION USED IN THE STATUTE IS ' PARTICIPATION IN CONTROL OR MANAGEMENT OR CAPITAL', BUT ESSENTIALLY ALL THES E THREE INGREDIENTS REFER TO DE FACTO CONTROL ON DECISION MAKING. IN TE RMS OF THE BASIC RULE THUS, WHETHER ONE ENTERPRISE CONTROLS THE DECISION MAKING OF THE OTHER OR WHETHER DECISIONS MAKING OF TWO OR MORE ENTERPRISE ARE CONTROLLED BY SAME INTERESTS, THESE ENTERPRISES ARE REQUIRED TO B E TREATED AS 'ASSOCIATED ENTERPRISE'. SECTION 92A(2) GIVES PRACT ICAL ILLUSTRATIONS OF THIS KIND OF A CONTROL. ALL THESE ILLUSTRATIONS DEAL WIT H SIMPLE SITUATIONS OF DEALING WITH TWO ENTERPRISE, AS ENVISAGED IN SECTIO N 92A(1)(A), BUT THESE ARE EQUALLY GOOD FOR APPLICATION IN SITUATIONS INVO LVING MORE THAN TWO ENTERPRISE, AS ENVISAGED IN SECTION 92A(1)(B). SECT ION 92A(2)(E), FOR EXAMPLE, REFERS TO A SITUATION IN WHICH 'MORE THAN HALF OF THE DIRECTORS OR ITA 3749/MUM /14 12 MEMBERS OF THE GOVERNING BOARD, OR ONE OR MORE OF T HE EXECUTIVE DIRECTORS OR MEMBERS OF THE GOVERNING BOARD, OF EACH OF THE T WO ENTERPRISES ARE APPOINTED BY THE SAME PERSON OR PERSONS' BUT THIS D EEMING FICTION IS EQUALLY APPLICABLE WHEN THE SAME PERSON APPOINTS, S AY, MORE THAN HALF OF THE DIRECTORS OF THE GOVERNING BOARD FOR THREE O R MORE ENTERPRISES. A LITERAL INTERPRETATION TO THIS CLAUSE WILL MEAN THA T IF THIS RELATIONSHIP IS BETWEEN TWO ENTERPRISES, THESE TWO ENTERPRISES ARE REQUIRED TO BE TREATED AS 'ASSOCIATED ENTERPRISES' BUT WHEN THE SAME BASIS EXTENDS TO MORE THAN TWO ENTERPRISES, THESE ENTERPRISES WILL NOT BE ASSOCIATED ENTERPRISES. THAT IS CLEARLY AN INCONGRUOUS RESULT. IN OUR CONSIDERED 'VIEW, AS ALL CLAUSES OF DEEMING FICTIONS SET OUT I N SECTION 92:(2) ARE ONLY ILLUSTRATION OF THE MANNER IN WHICH THIS DE FACTO C ONTROL ON DECISION MAKING EXISTS, IT IS NECESSARY THAT, WHILE INTERPRE TING THESE DEEMING FICTIONS, WE INTERPRET THE SAME IN SUCH A MANNER AS TO MAKE THEM WORKABLE RATHER THAN REDUNDANT (UT RES MAGIS VALEAT QUAM PEREAT), AND THAT THE SAME TEST OF EFFECTIVE CONTROL ON DECISION MAKING AS ARE IMPLICIT IN DEEMING FICTION UNDER SECTION 92(A)(2) WE ALSO A PPLY TO THE SITUATIONS OF MORE THAN TWO ASSOCIATED ENTERPRISES ENVISAGED I N SECTION 92A(1)(B). IN THIS LIGHT, LET US ANALYSE THE SITUATION BEFORE US. THE MANUFACTURE OF GOODS IS CARRIED OUT BY THE CBU KONKAN AGRO, WHICH IS CONTROLLED BY THE ASSESSEE INASMUCH AS THE CBU IS WHOLLY DEPENDENT ON THE USE OF TRADE- MARKS IN RESPECT OF WHICH THE ASSESSEE HAS EXCLUSIV E RIGHTS. THIS RELATIONSHIP MEETS THE TEST OF DE FACTO CONTROL ON DECISION MAKING AS SET OUT IN SECTION 92A(2)(G). THE ASSESSEE IN TURN, AS EVIDENT FROM INFORMATION IN FORM 3CEB, IS CONTROLLED, BY WAY OF EQUITY PARTI CIPATION, BY DIAGEO PLC WHICH ALSO SIMILARLY CONTROLS OTHER ENTITIES IN THE DIAGEO GROUP, INCLUDING THE ENTITIES FROM WHICH CBU HAS IMPORTED THE RAW MATERIALS. DIAGEO PLC THUS, THROUGH THE ASSESSEE AS AN INTERME DIARY, CONTROLS THE CBU AS ALSO THE DIAGEO GROUP ENTITIES FROM WHICH TH E CBU HAS IMPORTED RAW MATERIALS. CLEARLY, THEREFORE, THE ASSESSEE, AS ALSO THE CBU AND ITS DIAGEO GROUP SUPPLIER OF RAW MATERIALS ARE ASSOCIAT ED ENTERPRISES, AND DE FACTO ALL THESE ENTERPRISES ARE CONTROLLED, DIRE CTLY OR INDIRECTLY OR THROUGH INTERMEDIARIES, BY THE SAME PERSON I.E. DIA GEO PLC. IN THIS VIEW OF THE MATTER, AS ALSO BEARING IN MIND ENTIRETY OF THE CASE, THE RELATIONSHIP OF AES EXIST BETWEEN THE ASSESSEE, THE CBU AND DIEGO GROUP ENTITIES FROM WHICH RAW MATERIALS WERE PURCHASED BY THE CBU. IN ANY CASE, SINCE THE COSTS OF ALL THE RAW MATERIALS IS P ICKED UP BY THE ASSESSEE FOR ALL EFFECTIVE PURPOSES. THE TRANSACTIO N IS ACTUALLY BETWEEN THE ASSESSEE AND THE DIAGEO GROUP CONCERNS SUPPLYIN G THE RAW MATERIAL TO THE CBU, AND SINCE THE ASSESSEE AS ALSO THESE VE NDORS ARE ADMITTEDLY UNDER THE CONTROL OF DIAGEO PLC, THE TRANSACTIONS A RE CLEARLY BETWEEN THE ASSOCIATED ENTERPRISES THE OBJECTION RAISED BY THE ASSESSEE TO THE EFFECT THAT THE TRANSACTIONS OF IMPORTS OF RAW MATERIAL BY THE CBU, I. E. KONKAN AGRO, FROM DIAGEO GROUP ENTITIES CANNOT BE TREATED AS INTERNATIONAL TRANSACTIONS BETWEEN THE ASSOCIATED ENTERPRISES, TH EREFORE, IS REJECTED. THE TRIBUNAL WAS OF THE VIEW THAT ALL THE CLAUSES O F DEEMING FICTIONS SET OUT IN SECTION 92A (2) ARE ONLY ILLUSTRATION OF THE MANNER IN WHICH THIS DE FACTO ITA 3749/MUM /14 13 CONTROL ON DECISION MAKING EXISTS. WE WILL NOW EXA MINE THE FACTS OF THE CASE IN HAND IN THE CONTEXT OF THE REQUIREMENT OF ONE EN TERPRISE PARTICIPATE DIRECTLY OR INDIRECTLY OR THROUGH ONE OR MORE INTERMEDIARIES INTER ALIA IN THE MANAGEMENT OF THE OTHER ENTERPRISE AS PER CLAUSE (A ) & (B) OF S.S. (1) OF SECTION 92A. THE ASSESSEE HAS GIVEN THE POSITION OF THE DI RECTORS AND SHAREHOLDERS OF THE ASSESSEE AND KAYBEE EXIM PTE LIMITED, SINGAPORE DURING THE FINANCIAL YEAR 2007-08 RELEVANT TO THE ASSESSMENT YEAR UNDER CONSIDERATION AT PAGE 97 OF THE PAPER BOOK AS UNDER:- DIRECTORS KAYBEE INDIA PVT. LTD.[YES/NO] KAYBEE EXIM {TE LTD. [YES/NO] 1. MR. DEEPAK GURNAMI YES - DIRECTOR NO 2. MR. GOVIND KARUNAKARAN YES - DIRECTOR YES - DIRECTO R 3. MR. SURESH CHAND GUPTA YES - DIRECTOR NO 4. MR. VIKRAM CHAND NO YES DIRECTOR 5. MR. KUMAR KISHINCHAND GAJWANI NO YES - DIRECTOR SHAREHOLDERS KAYBEE INDIA PVT. LTD. NO.OF : % OF SHARES : HOLDING KAYBEE EXIM PTE LTD. [%OF HOLDING 1. MR. GOVIND KARUNAKARAN 999 SHARES: 99.9% 0% 2. MR. DEEPAK GURNAMI 1 SHARE : 0.1% 0% FROM THE ABOVE DETAILS, IT IS SEEN THAT MR. GOVIND KARUNAKARAN IS A DIRECTOR IN THE ASSESSEE COMPANY AND ALSO A DIRECTOR IN KAYB EE EXIM PTE LIMITED, SINGAPORE. HE IS ALSO HOLDING 99.9% OF SHAREHOLDING IN THE ASSESSEE COMPANY. THE A.O. HAS RECORDED THE FACTS REGARDING THE POSIT ION OF THE MANAGEMENT/DIRECTOR IN THE KAYBEE EXIM PTE LIMITED, SINGAPORE AS UNDER:- SR NO. NAME (AS PER ROC FILING) DATE OF APPOINTMENT (AS PER FILING) DESIGNATION IN KAYBEE PVT. LTD (AS PER ROC FILING) DESIGNATION IN GRUPOKAYBEE AS WWW.KAYBEEGROUP 1 SHRI VIKRAM KUMAR CHAND 07.05.1993 CHAIRMAN CUM MANAGING DIRECTOR MANAGING DIRECTOR ITA 3749/MUM /14 14 2 SHRI DEEPAK ATMARAM GURNAMI 07.05.1993 DIRECTOR DIRECTOR 3 SHRI GOVIND KARUNAKARAN 19.02.1996 DIRECTOR CHIEF OPERATING OFFICER 4 SHRI NAGENDRA KUMAR RALLAOALLI 19.02.1996 DIRECTOR FINANCE DIRECTOR 5 SHRI SURESH CHAND GUPA 18.08.1997 DIRECTOR -- THERE IS NO DENIAL OF THE FACT THAT MR. GOVIND KARU NAKARAN IS DIRECTOR AND 99.9% SHAREHOLDER OF THE ASSESSEE COMPANY AND ALSO IS A DIRECTOR AND CHIEF OPERATING OFFICER OF KAYBEE EXIM PTE LIMITED, SINGA PORE. THEREFORE, MR. GOVIND KARUNAKARAN IS NOT ONLY PARTICIPATES IN MANA GEMENT OF BOTH THE COMPANIES BY HE IS HOLDING THE KEY POSITION IN THE MANAGEMENT OF KAYBEE EXIM PTE LIMITED, SINGAPORE AND IS PART OF DECISION MAKING PROCESS OF THE SAID COMPANY SINCE 1996. SHRI GOVIND KARUNAKARAN I S A COMMON DIRECTOR IN BOTH THE COMPANY AND PARTICIPATING IN THE MANAGEMEN T OF BOTH THE COMPANIES NOT FOR THE NAME SAKE BUT HE IS HOLDING T HE KEY POSITION IN TAKING DECISION BEING A CHIEF OPERATING OFFICER OF KAYBEE EXIM PTE LIMITED, SINGAPORE AND ALMOST THE ENTIRE SHAREHOLDING OF THE ASSESSEE COMPANY, THEREFORE, THE CONDITION OF ONE ENTERPRISE PARTICIP ATES DIRECTLY OR INDIRECTLY OR THROUGH ONE OR MORE INTERMEDIARIES IN ITS MANAGEMEN T OR CONTROL OR CAPITAL AS PRESCRIBED UNDER CLAUSE (A) & (B) OF S.S. (1) OF SE CTION 92A IS SATISFIED. HENCE, THE ASSESSEE AND KAYBEE EXIM PTE LIMITED, SINGAPORE FALLS UNDER THE MEANING OF AES AS PER THE PROVISIONS OF SECTION 92A. 9. GROUND NO. 4 IS REGARDING TP ADJUSTMENT ON ACCOU NT OF SERVICE CHARGES/COMMISSION RECEIVED BY THE ASSESSEE IN RESP ECT OF PROCUREMENT OF YARN ON BEHALF OF KAYBEE EXIM PTE LIMITED, SINGAPOR E (AE). 10. DURING THE YEAR UNDER CONSIDERATION, THE ASSESS EE HAS RECEIVED SERVICE CHARGES/COMMISSION FROM KAYBEE EXIM PTE LIMITED, SI NGAPORE (AE) QUA PURCHASE OF FABRICS AND YARN ON BEHALF OF AE. THE ASSESSEE RECEIVED 2% ITA 3749/MUM /14 15 COMMISSION TOWARDS PURCHASE OF FABRIC/TAXTILE AND . 75% TOWARDS PURCHASE OF YARN. THE A.O. HAS ACCEPTED THE COMMISSION @ 2% RE CEIVED BY THE ASSESSEE TOWARDS PURCHASE OF TEXTILE/FABRIC, HOWEVER, THE CO MMISSION RECEIVED BY THE ASSESSEE IN RESPECT OF PROCUREMENT OF YARN ON BEHAL F OF AE WAS DETERMINED BY THE A.O. AT 2% AS ARMS LENGTH PRICE. THE A.O. HAS ADOPTED THE COMMISSION OF 2% RECEIVED BY THE ASSESSEE ON PURCHASE OF TEXTILE AS ARMS LENGTH PRICE OF THE COMMISSION RECEIVED BY THE ASSESSE ON PURCHASE OF Y ARN. THE ASSESSEE HAS OBJECTED THE ACTION OF THE A.O. AND CONTENDED BEFOR E THE LD. CIT(A) THAT THE PREVAILING MARKET RATE OF THE COMMISSION FOR PROCUR EMENT OF YARN IS RANGING FROM 0.5% TO 0.75%.IN SUPPORT OF THE CLAIM, THE ASS ESSEE HAS SUBMITTED A CERTIFICATE/LETTER ISSUED BY THE SHREE SOLAPUR YARN MERCHANT ASSOCIATION. SINCE THIS LETTER WAS PRODUCED FOR THE FIRST TIME B EFORE THE LD. CIT(A), THEREFORE, THE LD. CIT(A) ISSUED A REMAND ORDER AND ASKED THE A.O. TO SUBMIT THE REMAND REPORT. THE A.O. OBJECTED FOR THE ADMIS SION OF THE ADDITIONAL EVIDENCE. THE LD. CIT(A), THOUGH, ADMITTED THE ADDI TIONAL EVIDENCE, HOWEVER, DID NOT ACCEPT THE RATE PROVIDED IN THE SAID LETTER ON THE GROUND THAT THE LETTER WAS ISSUED BY THE SHREE SOLAPUR YARN MERCHANT ASSOC IATION ON 21-11-2011 AND, THEREFORE, IT DOES NOT PERTAIN FOR THE ASSESSM EWNT YEAR UNDER CONSIDERATION. THE LD. CIT(A) ACCORDINGLY CONFIRME D THE ARMS LENGTH PRICE ADOPTED BY THE A.O. AND THE CONSEQUENT ADJUSTMENT. 11. BEFORE US, THE LD. SR. COUNSEL FOR THE ASSESSEE SUBMITTED THAT THOUGH THE SAID LETTER WAS ISSUED BY SHREE SOLAPUR YARN ME RCHANT ASSOCIATION ON 21- 11-2011 BUT THE RATES CONFIRMED IN THE SAID LETTER WERE PREVAILING IN THE ASSESSMENT YEAR UNDER CONSIDERATION. HE HAS FURTHER SUBMITTED THAT TO CLARIFY THIS, THE ASSESSEE HAS NOW SUBMITTED A FRESH LETTER ISSUED BY SHREE SOLAPUR YARN MERCHANT ASSOCIATION ON 8.1.2015 WHEREIN IT HA S BEEN CONFIRMED THAT THE RATE OF BROKERAGE WAS PREVALENT DURING THE F.Y. 2007-08. THUS, THE LD. SR. COUNSEL FOR THE ASSESSEE HAS PLEADED THAT THIS LETT ER CAN BE ADMITTED AS ADDITIONAL EVIDENCE IN SUPPORT OF THE CLAIM OF THE ASSESSEE. HE HAS FURTHER ITA 3749/MUM /14 16 CONTENDED THAT THE A.O. HAS ADOPTED THE ARMS LENGT H PRICE WITHOUT CONDUCTING ANY EXERCISE AS PER THE PROVISIONS OF CH APTER OF THE ACT. EVEN OTHERWISE THE RATE OF COMMISSION FOR PROCUREMENT OF TEXTILE CANNOT BE COMPARED WITH THE RATE OF COMMISSION FOR PROCUREMEN T OF YARN. THUS THE LD. SR. COUNSEL HAS SUBMITTED THAT THE ARMS LENGTH PRI CE ADOPTED BY THE A.O. CANNOT BE CONSIDERED AS AN UNCONTROLLED COMPARABLE PRICE. 12. ON THE OTHER HAND, THE LD. D.R. HAS SUBMITTED T HAT THE ASSESSEE HAS NOT FURNISHED THE RELEVANT RECORD AND TP STUDY ANAL YSIS, THEREFORE, THE A.O. HAD NO OPTION BUT TO ESTIMATE THE ARMS LENGTH PRIC E. HE HAS RELIED UPON THE ORDERS OF AUTHORITIES BELOW. 13. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AS WEL L AS THE MATERIAL PLACED ON RECORD. THE ARMS LENGTH PRICE IN RELATION TO A N INTERNATIONAL TRANSACTION SHALL BE DETERMINED BY ANY OF THE METHOD PRESCRIBED U/S 92C OF THE ACT, THEREFORE, IN ORDER TO DETERMINE THE ARMS LENGTH P RICE, THE COMPARABLE UNCONTROLLED PRICE HAS TO BE CONSIDERED AS PER THE APPROPRIATE METHOD APPLIED IN A PARTICULAR CASE. IN THE CASE IN HAND, THE A.O. HAS NOT DETERMINED THE ARMS LENGTH PRICE BY TAKING INTO CONSIDERATION AN UNCONTROLLED PRICE OR UNCONTROLLED TRANSACTION. THE A.O. HAS ADOPTED THE PRICE BEING THE COMMISSION RECEIVED BY THE ASSESSEE IN RESPECT OF T EXTILE PROCUREMENT FROM ITS AE FOR THE PURPOSE OF ARMS LENGTH COMMISSION FOR P ROCUREMENT OF YARN, THEREFORE, THE PRICE/TRANSACTION ADOPTED BY THE A.O . IS NOT AN INDEPENDENT OR UNCONTROLLED PRICE OR TRANSACTION BUT IT WAS A CONT ROLLED TRANSACTION BETWEEN RELATED PARTIES. HENCE, THE ARMS LENGTH PRICE ADOP TED BY THE A.O. IS NOT SUSTAINABLE AS PER THE PROVISIONS OF THE ACT. ACCO RDINGLY, WE SET ASIDE THE ORDERS OF THE AUTHORITIES BELOW IN RESPECT OF ADOPT ING THE ARMS LENGTH COMMISSION TOWARDS PROCUREMENT OF YARN AND REMIT TH E ISSUE TO THE RECORD OF THE A.O. FOR DETERMINATION OF THE SAME AFRESH AS PE R LAW AFTER CONSIDERING THE ITA 3749/MUM /14 17 ADDITIONAL EVIDENCE FILED BY THE ASSESSEE. NEEDLES S TO SAY THE ASSESSEE MAY BE GIVEN APPROPRIATE OPPORTUNITY OF BEING HEARD BEF ORE DECIDING THE ISSUE. 14. GROUND NO. 5 IS REGARDING DISALLOWANCE OF SOCIE TY CHARGES AND PROPERTY TAX PAID BY THE ASSESSEE. 15. THE ASSESSE HAS TAKEN ON RENT THE PREMISES AT M ADHAVA BUILDING AND USED THE SAME FOR ITS BUSINESS PURPOSE. THE ASSESS EE PAID RS. 1,70,012/- AS PROPERTY TAX AND SOCIETY CHARGES FOR THE SAID PREMI SES. THE A.O. DISALLOWED THE PROPERTY TAX AND SOCIETY CHARGES ON THE GROUND THAT IT IS NOT THE LIABILITY OF THE ASSESSEE AS PER THE AGREEMENT BETWEEN THE OW NER AND THE ASSESSEE. THE A.O. HAS ALSO RELIED UPON THE ORDER OF THE CIT( A) FOR A.Y. 2004-05 WHEREIN A SIMILAR DISALLOWANCE WAS MADE. THE ASSESSEE THOU GH CHALLENGED THE ACTION OF THE A.O. BEFORE THE LD. CIT(A) BUT COULD NOT SUC CEED. 16. BEFORE US, THE LD. SR. COUNSEL FOR THE ASSESSEE HAS SUBMITTED THAT THE AMOUNT OF PROPERTY TAX AND SOCIETY CHARGES IS AN AL LOWABLE DEDUCTION U/S 37(1) OF THE ACT BECAUSE THE SAME ARE PAID BY THE A SESSEE IN RESPECT OF THE PREMISES USED FOR THE BUSINESS OF THE ASSESSEE. THE RE IS NO DISPUTE THAT THE ASSESSEE HAS PAID THESE CHARGES AS PER THE UNDERSTA NDING WITH THE OWNER OF THE PROPERTY AND, THEREFORE, IT IS THE LIABILITY OF THE ASSESSEE. THE LD. SR. COUNSEL FURTHER CONTENDED THAT FOR A.Y. 2004-05, TH E ASSESSEE DID NOT CHALLENGE THE ORDER OF THE CIT(A) FOR THE REASON TH AT THE AMOUNT INVOLVED IN THE SAID YEAR WAS VERY SMALL AND IT WAS ONLY DISALL OWANCE IN THE SAID YEAR, THEREFORE, BY CONSIDERING THE FACT THAT THE EXPENDI TURE FOR FILING THE APPEAL BEFORE THE TRIBUNAL WOULD HAVE BEEN MUCH MORE THAN THE TAX LIABILITY ON THE SAID AMOUNT OF DISALLOWANCE ON ACCOUNT OF PROPERTY TAX AND SOCIETY CHARGES. HE HAS FURTHER CONTENDED THAT WHEN THE ASSESSEE HAS DISPUTED THE DISALLOWANCE EVEN FOR THE A.Y. 2004-05 BUT THE SAME WAS CONFIRMED BY THE LD. CIT(A) WOULD NOT OPERATE AS RES JUDICATA FOR THE YE AR UNDER CONSIDERATION. HE HAS RELIED UPON THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF ITA 3749/MUM /14 18 SASSOON J. DAVID AND CO. P. LTD. VS. CIT , (1979)11 8 ITR 261(SC) AND SUBMITTED THAT FOR ALLOWING DEDUCTION U/S 371(1), I T IS NOT THE CONDITION THAT THE EXPENDITURE MUST BE NECESSARY FOR THE ASSESSEE. ONCE THE ASSESSEE HAS INCURRED THE EXPENDITURE WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS, IT IS ENTITLED FOR DEDUCTION. 17. ON THE OTHER HAND, THE LD. D.R. HAS SUBMITTED T HAT THE ASSESSEE HAS FAILED TO PROVE THAT THE ASSESSEE WAS UNDER OBLIGAT ION TO INCUR THE SAID EXPENDITURE. IF THE ASSESSEE IS MAKING THE PAYMENT ON BEHALF OF THE OWNER, IT CANNOT BE ALLOWED AS BUSINESS EXPENDITURE. THE LD. D.R. HAS FURTHER SUBMITTED THAT WHEN THE FACTS AND CIRCUMSTANCES OF THE CASE FOR THE YEAR UNDER CONSIDERATION ARE IDENTICAL TO THAT OF A.Y. 2 004-05, THEN, AS PER RULE OF CONSISTENCY, THE ASSESSEE CANNOT CHALLENGE THE DISA LLOWANCE MADE ON THIS ACCOUNT. 18. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AS WEL L AS THE RELEVANT MATERIAL PLACED ON RECORD. THE A.O. HAS DISALLOWED THE CLAIM OF PROPERTY TAX AND SOCIETY CHARGES ON THE GROUND THAT THE LEASE AG REEMENT IS SILENT ON THIS GROUND. WHEN THE ASSESSEE HAS MADE THE PAYMENT OF PROPERTY TAX AND SOCIETY CHARGES FOR THE PREMISES USED FOR THE BUSIN ESS OF THE ASSESSEE, THEN, IN THE ABSENCE OF ANY FACTS OR MATERIAL BROUGHT BY THE A.O. ON RECORD THAT THE SAID PAYMENT WAS MADE BY THE ASSESSEE CONTRARY TO T HE TERMS AND CONDITIONS OF THE AGREEMENT OR ON BEHALF OF THE OWNER OF THE P ROPERTY, THEN, THE A.O. HAS PROCEEDED ONLY ON THE ASSUMPTION AND NOT ON ANY TAN GIBLE MATERIAL OR FACT. THOUGH THE ISSUE WAS DECIDED BY THE COMMISSIONER FO R THE A.Y. 2004-05, HOWEVER, THE SAID ORDER WAS NOT CHALLENGED BEFORE T HE TRIBUNAL. WE FIND THAT NEITHER THE A.O. HAS CONDUCTED THE ENQUIRY NOR THE ASSESSEE HAS PRODUCED ANY EVIDENCE IN SUPPORT OF THE CLAIM THAT THIS PAYM ENT WAS MADE BY THE ASSESSEE AS PER THE MUTUAL UNDERSTANDING. THIS ISS UE REQUIRED PROPER EXAMINATION AND VERIFICATION. ACCORDINGLY, WE SET A SIDE THIS ISSUE TO THE ITA 3749/MUM /14 19 RECORD OF THE A.O. TO DECIDE THE SAME AFRESH DE HOR SE THE ORDER FOR THE A.Y. 2004-05. THE ASSESSEE IS DIRECTED TO PRODUCE THE RE LEVANT RECORD AND EVIDENCE IN SUPPORT OF THE CLAIM THAT THE PAYMENT OF PROPERT Y TAX AND SOCIETY CHARGES WERE MADE UNDER THE MUTUAL UNDERSTANDING WITH THE O WNER OF THE PROPERTY. 19. IN THE RESULT, APPEAL FILED BY THE ASSESSEE IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 29-05-2015. !' # $% &! ' 29-05-2015 ( ) SD/ - SD/ - (RAJENDRA) (VIJAY PAL RAO ) ACCOUNTANT MEMBER JUDICIAL MEMBER $ 4 MUMBAI ; &! DATED 29-05-2015 [ .;../ R.K. , SR. PS ! '#$% &%# / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDENT. 3. < () / THE CIT(A) 15 MUMBAI 4. < / CIT- 1 MUMBAI 5. ?@( ;;AB , AB , $ 4 / DR, ITAT, BANGALORE K BENCH 6. (DE F / GUARD FILE. ' / BY ORDER, ? ; //TRUE COPY// (/') * ( DY./ASSTT. REGISTRAR) , $ 4 / ITAT, MUMBAI