Asstt. Commissioner of Income Tax-6, Kanpur V. M/sRahman Industries Ltd., Kanpur

ITA 389/LKW/2013

• Counselvise Citation: [2015] 121 COUNSELVISE.COM (IT) 0561 (ITAT-LUCKNOW)
• Duration Of Justice: 2 year(s) 11 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 12-06-2015
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 01-05-2015
• Assessment Year: 2007-2008
• Appeal Filed On: 31-05-2013
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Business income; Transfer pricing; Business expenditure; International transaction; Assessment record
• Section: 37; 92

Judgement Text

1 IN THE INCOME TAX APPELLATE TRIBUNAL LUCKNOW BENCH B, LUCKNOW BEFORE SHRI SUNIL KUMAR YADAV, JUDICIAL MEMBER AND SHRI A.K. GARODIA, ACCOUNTANT MEMBER ITA NO.389/LKW/2013 ASSESSMENT YEAR:2007 - 08 A.C.I.T. - 6, KANPUR. VS. M/S RAHMAN INDUSTRIES LTD., FORMERLY KNOWN AS RAHMAN EXPORTS PVT. LTD., 184/167, WAZIDPUR, JAJMAU, KANPUR. PAN:AAACR6862N (APPELLANT) (RESPONDENT) ITA NO.316/LKW/2013 ASSESSMENT YEAR:2008 - 09 A.C.I.T. - 6, KANPUR. VS. M/S RAHMAN EXPORTS PVT. LTD., 184/167, WAZIDPUR, JAJMAU, KANPUR. PAN:AAACR6862N (APPELLANT) (RESPONDENT) O R D E R PER SUNIL KUMAR YADAV: THESE APPEALS ARE PREFERRED BY THE REVENUE AGAINST THE RESPECTIVE ORDERS OF CIT(A) ON COMMON GROUNDS. S INCE THESE APPEALS WERE HEARD TOGETHER, THESE ARE BEING DISPOSED OF THROUGH THIS CONSOLIDATED ORDER FOR THE SAKE OF CONVENIENCE. APPELLANT BY SHRI O. N. PATHAK, D.R. REVENUE BY SHRI RAKESH GARG, ADVOCATE DATE OF HEARING 01/05/2015 DATE OF PRONOUNCEMENT 1 2 / 06/ 2015 2 2. THE GROUNDS RAISED BY THE REVENU E IN I.T.A. NO.389/LKW/2013 ARE EXTRACTED HEREUNDER FOR THE SAKE OF REFERENCE: 1. THE LD. CIT(A) HAS ERRED IN LAW AND ON FACTS IN ALLOWING THE RELIEF OF RS.57,07,130/ - ON ACCOUNT OF TRANSFER PRICING ADJUSTMENT BY REJECTING RSM METHOD AND ADOPTING TNMM M ETHOD WITHOUT APPRECIATING THE FULL FACTS OF THE CASE BROUGHT ON RECORD BY THE TPO. 2. THE LD. CIT(A) HAS ERRED IN LAW AND ON FACTS IN DELETING THE DISALLOWANCE OF RS.32,03,384/ - ON THE STUDY IN FOREIGN OF SHRI HAMMAD RAHMAN AND SHRI EBBAD RAHMAN AND ALSO REMUNERATION OF RS.1,20,000/ - PAID TO SHRI HAMMAD RAHMAN CLEARLY COVERED U/S 40A(2)(B) OF THE I.T. ACT, 1961. 3. THE LD. CIT(A) HAS ERRED IN LAW AND ON FACTS IN ALLOWING RELIEF OF RS.6,00,000/ - ON DIRECTORS REMUNERATION WITHOUT APPRECIATING THE FACT THAT REMUNERATION WAS ENHANCED DRASTICALLY EVEN WHEN THERE WAS ALMOST NO GROWTH IN BUSINESS. 4. THAT THE ORDER OF THE LD. CIT(A) BEING ERRONEOUS UNJUST AND BAD IN LAW BE VACATED AND THE ORDER OF THE ASSESSING OFFICER RESTORED. 3. THE GROUNDS RAISED BY THE R EVENUE IN I.T.A. NO.316/LKW/2013 ARE ALSO EXTRACTED HEREUNDER FOR THE SAKE OF REFERENCE: 1. THE LD. CIT(A) HAS ERRED IN LAW AND ON FACTS IN ALLOWING THE RELIEF OF RS.8,20,572/ - ON EXPENDITURE INCURRED ON STUDY ABROAD OF SHRI HAMMAD RAHAMAN, THE SON OF A DIRECTOR AND ALSO REMUNERATION OF RS.1,20,000/ - PAID TO SHRI HAMMAD RAHAMAN EVEN WHEN HE IS CLEARLY COVERED U/S 40A(2)(B) OF THE I.T. ACT, 1961. 2. THE LD. CIT(A) HAS ERRED IN LAW AND ON FACTS IN DELETING THE ADDITION OF RS.2,23,73,153/ - MADE BY THE AO BY WAY OF ADJUSTMENT OF TRANSFER PRICING UNDER SECTION 92CA(3) WITHOUT GIVING ANY OPPORTUNITY TO THE TPO AS THE ASSESSEE HAD NOT FURNISHED THE DETAILS OF CLOSING STOCK WHICH ARE ATTRIBUTABLE TO THE SALES TO THE AE BEFORE THE TPO. 3 3. LD. CIT(A) HAS ERRED IN LAW AND ON FACTS IN DELETING THE ADDITION OF RS.2,23,73,153/ - MADE BY THE AO BY WAY OF ADJUSTMENT OF TRANSFER PRICING UNDER SECTION 92CA(3) WITHOUT APPRECIATING THE FACTS BROUGHT ON RECORD BY THE AO. 4. THAT THE ORDER OF THE ID. COMMISSIONER OF INCOME TAX (APPEALS) BEING ERRONEOUS, UNJUST AND BAD IN LAW BE VACATED AND THE ORDER OF THE ASSESSING OFFICER BE RESTORED. 4. GROUND NO. 1 IN BOTH THE APPEALS RELATES TO THE ADDITIONS MADE ON ACCOUNT OF TRANSFER PRICING ADJUSTMENT MADE BY T . P .O. AND ADOPTED BY TH E ASSESSING OFFICER. DURING THE ASSESSMENT YEAR 2007 - 08, IT WAS OBSERVED BY THE ASSESSING OFFICER THAT THE ASSESSEE HAS ENTERED INTO INTERNATIONAL TRANSACTION HAVING REGARDED TO ARMS LENGTH PRICE COVERED U/S 92 UNDER CHAPTER - X OF THE INCOME TAX ACT, 1961 . AS THE TOTAL AMOUNT OF SUCH INTERNATIONAL TRANSACTION EXCEEDED RS. 5 CRORES, THE CASE OF THE ASSESSEE WAS REFERRED TO THE ADDL. DIRECTOR OF INCOME TAX/TRANSFER PRICING OFFICER FOR COMPUTING THE ARMS LENGTH PRICE. THE ORDER U/S 92CA(3) OF THE ACT DATED 29/10/2010 PASSED BY TPO WAS RECEIVED BY THE ASSESSING OFFICER AND THE ASSESSING OFFICER ACCORDINGLY ADOPTED THE TOTAL TRANSFER PRICING ADJUSTMENT OF RS.57,07,130/ - AND MADE THE ADDITION OF THE SAME TO THE INCOME OF THE ASSESSEE. AN APPEAL WAS PREFERRED BEFORE THE CIT(A) RAISING VARIOUS ISSUES. THE REFERENCE TO TPO WAS ALSO CHALLENGED BY THE ASSESSEE ON THE GROUND THAT BEFORE MAKING A REFERENCE, THE ASSESSING OFFICER OUGHT TO HAVE GIVEN OPPORTUNITY TO THE ASSESSEE AS TO WHY THE MATTER BE NOT REFERRED TO TPO. SINCE THE REFERENCE WAS MADE WITHOUT AFFORDING OPPORTUNITY TO THE ASSESSEE, THE REFERENCE ITSELF IS BAD. ON MERIT, THE ASSESSEE HAS ALSO CHALLENGED THE COMPUTATION MADE BY TPO BY ADOPTING A RESALE METHOD (RSM METHOD) TO DETERMINE THE ARMS LENGTH PRICE. IT WAS CONTENDED BEFORE THE CIT(A) THAT THE RESALE METHOD CAN ONLY BE APPLIED IN 4 CASE OF IMPORTERS WHERE AS THE ASSESSEE IS 100% EXPORTER THEREFORE, THE RESALE METHOD CANNOT BE APPLIED TO COMPUTE THE ARMS LENGTH PRICE . THE CIT(A) RE - EXAMINED THE ISSUE IN THE LIGHT OF THE ASSESSEES CONTENTION AND WAS OF THE VIEW THAT THE TPO HAS WRONGLY APPLIED THE RESALE METHOD TO DETERMINE THE ARMS LENGTH PRICE WHEREAS IN SUCCEEDING ASSESSMENT YEAR I.E. 2008 - 09, TPO HIMSELF HAS ADO PTED THE TNMM METHOD TO DETERMINE THE ARMS LENGTH PRICE. THE CIT(A) WAS ALSO OF THE VIEW THAT THE RESALE METHOD CANNOT BE APPLIED TO DETERMINE THE ARMS LENGTH PRICE IN CASE OF AN EXPORTER. THE CIT(A) HOWEVER ALSO REJECTED THE CUP METHOD ADOPTED BY THE ASSESSEE FOR DETERMINING THE ARMS LENGTH PRICE CONSIDERING THE TNMM METHOD AS MOST APPROPRIATE METHOD TO COMPUTE THE ARMS LENGTH PRICE. THE ASSESSEE HAS FURNISHED THE CALCULATIONS AS PER TNMM METHOD ALSO, WHICH WAS VERIFIED BY CIT(A) AND ON VERIFICATION , THE CIT(A) WAS OF THE VIEW THAT THE DIFFERENCE BETWEEN THE TWO PLIS IS WITHIN RANGE OF +5% THEREFORE, NO ADJUSTMENT WAS REQUIRED TO BE MADE. HE ACCORDINGLY DELETED THE ADJUSTMENT OF RS.57,07,130/ - MADE BY THE ASSESSING OFFICER. HE HOWEVER ASKED THE ASS ESSING OFFICER/TPO TO VERIFY THE CALCULATION. 5. AGGRIEVED, THE REVENUE HAS PREFERRED AN APPEAL BEFORE THE TRIBUNAL AND LEARNED D. R. HAS PLACED RELIANCE UPON THE ORDER OF THE ASSESSING OFFICER AND THE TPO WHEREAS LEARNED COUNSEL FOR THE ASSESSEE, BESIDES PLACING RELIANCE UPON THE ORDER OF CIT(A) HAS CONTENDED THAT IN THE SUCCEEDING YEAR, THE TPO HIMSELF HAS ADOPTED THE TNMM METHOD TO DETERMINE THE ARMS LENGTH PRICE AFTER REJECTING THE CUP METHOD ADOPTED BY THE ASSESSEE. THE CIT(A) HAS FOLLOWED THE TNMM METHOD TO DETERMINE THE ARMS LENGTH PRICE AND SINCE THE DIFFERENCE BETWEEN TWO PLIS IS WITHIN THE RANGE OF +5%, THE ADDITION WAS DELETED. LEARNED COUNSEL FOR THE ASSESSEE FURTHER CONTENDED THAT THE TPO AND ASSESSING OFFICER CANNOT ADOPT THE TWO METHODS I N DIFFERENT ASSESSMENT YEARS TO DETERMINE THE ARMS LENGTH PRICE. IT WAS FURTHER CONTENDED THAT THE RESALE METHOD 5 ADOPTED BY TPO IN THE IMPUGNED ASSESSMENT YEAR WAS NOT APPLICABLE IN THE CASE OF THE EXPORTERS AND IT CAN BE APPLIED TO DETERMINE THE ARMS L ENGTH PRICE IN CASE OF IMPORTERS ONLY. SINCE THE CIT(A) HAS TAKEN INTO ACCOUNT ALL THE RELEVANT FACTS, HIS ORDER DESERVES TO BE SUSTAINED. 6. WE HAVE CAREFULLY EXAMINED THE ORDERS OF THE LOWER AUTHORITIES IN THE LIGHT OF THE RIVAL SUBMISSIONS , WE FIND T HAT UNDISPUTEDLY THE RESALE METHOD IS TO BE APPLIED ONLY IN CASE OF IMPORTERS AND ASSESSEE IS EXPORTER THEREFORE, IT CANN OT BE APPLIED TO DETERMINE THE ARMS LENGTH PRICE IN INTERNATIONAL TRANSACTIONS. IT IS ALSO UNDISPUTED THAT IN SUCCEEDING YEAR 2008 - 09 , THE TPO ADOPTED THE TNMM METHOD TO DETERMINE THE ARMS LENGTH PRICE AND IN THAT ASSESSMENT YEAR, THE TPO HAS MADE CERTAIN ADJUSTMENTS ON DIFFERENT COUNTS AFTER ADOPTING THE TNMM METHOD. WE HAVE ALSO CAREFULLY EXAMINED THE ORDER OF CIT(A) AND WE FIND TH AT THE CIT(A) HAS TAKEN INTO ACCOUNT THE CALCULATIONS FURNISHED BY THE ASSESSEE IN ORDER TO DETERMINE THE ARMS LENGTH PRICE AS PER TNMM METHOD. HAVING NOTICE D THAT THE DIFFERENCE WAS NOMINAL, THE CIT(A) HAS DELETED THE ADDITIONS. WE , HOWEVER, FOR THE SAKE OF REFERENCE, EXTRACT THE ORDER OF CIT(A) AS UNDER: 4.3 DISCUSSION: 4.3.1 THE APPELLANT COMPANY HAD CERTAIN INTERNATIONAL TRANSACTIONS WITH ITS AES TO WHI CH INDIAN TRANSFER PRICING REGULATION (CONTAINED IN SEC. 92 TO SEC. 92 F OF THE I . T. ACT) APPLY . ON A REFERENCE MADE BY THE A.O., THE AUDIT OF THESE INTERNATIONAL TRANSACTIONS WA S UNDERTAKEN BY THE TPO, WHO AFTER GIVING DUE OPPORTUNITY TO THE ASSESSEE HAD P ASSED A N ORDER U/S 92CA DATED 27.10.2009 WHEREIN CERTAIN ADJUSTMENTS WERE ORDERED . TH E APPELLANT BEING AGGRIEVED IS IN APPEAL BEFORE THE UNDERSIGNED. 4.3.2 I HAVE GONE THROUGH THE IMPUGNED ORDER OF THE LD. TPO AND ALSO THE SUBMISSION S MADE BY THE APPELLANT IN THIS REGARD. SOME OF THE SALIENT FEATURES OF THIS ORDER OF THE TP O ARE: 6 I . THAT THE TPO HAS REJECTED THE CUP METHOD AS ADOPTED BY THE ASSESSEE B Y OBSERVING: 4. TRANSFER PRICING APPROACH OF THE ASSESSES AND TP ANALYSIS THE ASSESSES HAS BENCHMARKED ITS INTERNATIONAL TRANSACTIONS BY USING CUP METHOD BY COMPARING AVERAGE PRICE OF VARIOUS CATEGORIES OF PRODUCTS (BASED ON PRICE RANGE) WITH AVERAGE PRICE FOR SIMI L AR CATEGORY OF PRODUCTS SOLD TO THIRD PARTIES. 5. DEFECTS IN METHOD ADOPTED BY ASSESSEE THE CATEGORIZATION OF PRODUCTS BASED ON PRICE RANGE IS FLAWED ON ACCOUNT OF THE FOLLOWING REASONS: PRICES OF IDENTICAL PRODUCTS NEEDS TO BE COMPARED RATHER THAN PRICE OF A CATEGORY OF PRODUCTS. CATEGORIZATION, IF AT ALL, MAY BE MADE, OF IDENTICAL PRODUCTS. CATEGORIZATION BASED ON PRICE RANGE HAS AN INHERENT FLAW, SINCE, THE PRICE OF THE PRODUCT IS WHAT IS BEING COMPARED. A PRODUCT WORTH RS.500 IF SOLD TO THE AE AT RS.400, WOULD BE COMPARED WITH PRODUCTS THAT HAVE A PRICE OF RS.400. SUC H A COMPARISON IS BOUND TO SHOW THAT THE TRANSACTION PRICE IS AN ARM'S LENGTH PRICE, AND HENCE, SUCH A COMPARISON CANNOT BE ACCEPTED. THE ASSESSEE ITSELF HAS ADMITTED IN HIS SUBMISSION DATED 25.10.10 THAT 'THE PRICE OF FOOTWEAR SOLD BY THE ASSESSEE TO ITS AES RANGES FROM RS.300 PER PAIR TO OVER RS. 1000 PER PAIR AND INCLUDE SAFETY SHOES, GENTS' LEATHER SHOES ETC., WHICH A RE NOT COMPARABLE INTER - SE'. BY VIRTUE OF THIS ADMISSION IT IS EVIDENT THAT COMPARISON OF PRODUCT PRICES AT AN AVERAGE LEVEL AND AT AN ABS OLUTE LEVEL ARE NOT COMPARABLE AND THEREFORE, CUP METHOD CANNOT BE APPLIED. IN ORDER TO APPLY THE CUP METHOD, IDENTICAL PRODUCTS NEED TO BE SOLD / 7 PURCHASED UNDER IDENTICAL CIRCUMSTANCES. GIVEN THAT, IN THIS PARTICULAR CASE, THE CUP PERTAIN SO PRODUCT PRIC ES BEING COMPARED, DO NOT MEET THIS STANDARD OF COMPARABILITY.' II . THAT THE TPO (AFTER REJECTING THE CUP METHOD AS ADOPTED BY THE APPELLANT) HAS ADOPTED RSM METHOD AND HAS CALCULATED THE ALP BY OBSERVING AS UNDER: 6.1 THE ASSESSEE WAS REQUIRED TO SHOW CAUSE WHY ALP BE NOT COMPUTED BY USING RESALE PRICE METHOD AS FOLLOW: ( A ) SALES TO SAFET I X FRANCE (I) SALE PRICE OF SAFETIX FRANCE (AE) TO ITS CUSTOMERS 11,55,09,675 (II) LESS: 3.54% G.P. TO BE ALLOWED AS NORMAL MARGIN TO BE RETAINED BY THE AE 40,89,042 (III) ALP+(I) - (II) 11,14,20,633 (IV) PRICE CHARGED BY THE ASSESSEE FROM AE 10,17,16,868 6.2 IN RESPONSE TO THIS ASSESSEE VIDE REPLY DATED 25/10/10 HAS OBJECTED THE APPLICATION OF RESALE PRICE METHOD IN ITS CASE. THE ASSESSEE HAS SUBMITTED THAT THE RSM IS APPLICABLE IN CASES WHERE TO AN AE WHICH IS ENGAGED IN PURCHASE AND DISTRIBUTION OF PROPERLY OR SERVICES BACK TO BACK AND THUS SHALL NOT BE APPLICABLE IN THE CASE OF THE ASSESSEE AS THE ASSESSEE HAS NOT PURCHASED OR REDISTRIBUTED ANY MATERIAL. THEREFORE AS SUCH RSM CANNOT BE APPLIED IN THE ASSESSEE'S CASE, WHICH HAS SOLO GOODS TO ITS AES AND NOT VICE - VERSA. THE ARGUMENT OF THE ASSESSEE IS CONSIDERED BUT FOUND INCORRECT. THE PERTINEN T QUESTION IS WHETHER THE TESTED PARTY IS A TRADER. IN THE PRESENT CASE, THE AE IS THE TESTED PARTY AND NOT THE ASSESSEE AND THEREFORE, THE BUSINESS 8 OF THE ASSESSE E WOULD NOT BE PERTINENT AND RSM IS THE MOST APPROPRIATE METHOD, SINCE THE AE IS DISTRIBUTOR/TRADER. 4.3.3 THE APPELLANT IS AGGRIEVED BY SUCH ORDER AND HAS SUBMITTED THAT THE LD. TPO FELL IN ERROR BY ADOPTING RSM METHOD AS THE SAME WAS APPLICABLE ONLY FOR IMPORTERS AND NOT FOR AN EXPORTER. 4.4 DISCUSSION & DECISION: 4.4.1 I HAVE PERUSED THE ORDER OF THE TPO AND ALSO THE SUBMISSION MADE BY THE LD. A.R. AT THE OUTSET , IT MAY BE OBSERVED THAT THE RSM METHOD AS ADOPTED BY THE TPO WAS NOT LEGALLY CORRECT AS THE SAME IS APPLICABLE ONLY FOR IMPORTERS, WHEREAS THE PRESENT ASSESSEE IS IN THE BUSINESS OF EXPORTS ONLY. THE CUP METHOD HAS ALREADY BEEN REJECTED BY THE TPO AND THE ASSESSEE HAS NOT DISPUTED SUCH REJECTION. I ALSO FIND THAT IN THE SUBSEQUENT YEAR I.E . 2008 - 09, THE TPO HAS ADOPTED TNMM AS THE MOST APPROPRIATE METHOD TO COMPUTE THE ALP. ACCORDINGLY, I AM OF THE CONSIDERED VIEW THAT TNMM SHOULD BE ADOPTED AS THE MOST APPROPRIATE METHOD FOR COMPUTING ALP EVEN FOR THIS YEAR I.E. A.Y.2007 - 08. IN THIS REGARD , THE LD. A.R. OF THE APPELLANT/ VIDE MY LETTER DATED 04.01.2013 WAS REQUESTED TO GIVE FINANCIAL DETAILS OF COMPARABLE COMPANIES (AS ADOPTED BY THE TPO IN A.Y. 2008 - 09). THE LETTER READS AS UNDER: 'F. NO. CIT(A) - I/310/DCIT - VI/KNP/2012 - 13 DATED:04/01/2013 TO, THE PRINCIPAL OFFICER M/S RAHMAN INDUSTRIES LTD. KANPUR SUB: APPELLATE PROCEEDINGS FOR A.Y . 2 00 7 - 0 8 REG P L EASE REFER TO ABOVE. 2 . IN THIS REGARD, IT IS NOTICED FROM THE T.P. ORDER FOR A.Y. 2007 - 08 THAT THE CUP METHO D ADOPTED BY YOU TO COMPUTE THE ALP WAS REJECTED BY THE TPO. THE TPO HAD APP L IED RS M METHOD FOR COMPUTING THE ALP . YOU HAVE STATED IN YOUR SUBMISSIONS THAT RSM WAS NOT A CORRECT METHOD TO DETERMINE 9 THE ALP FOR THE ASSESSEE, WHO WAS AN EXPORTER AND NOT AN IMPORTER. 3. YOU ARE REQUESTED TO FILE THE NECESSARY FINANCIAL DETAILS ALO N G WITH COMPUTATION OF PLL (OP/TC) FOR YOUR COMPANY AND ALSO FOR THE COMPARABLE COMPANIES AS ADOPTED BY THE TPO IN HIS ORDER FOR A.Y.2008 - 09. 4. COMPLIANCE IS REQUESTED WITHIN 7 DA YS . (RAJ KUMAR LACHBIRAMKA) COMMISSIONER OF INCOME - TAX (APPEALS) - I , KANPUR' 4.4.2 VIDE LETTER DATED 11.01.2013, THE LD. A.R. SUBMITTED THE REQUIRED DETAILS WHICH ARE AS UNDER: S.NO. NAME OF THE OPERATING INTEREST & TOTAL OP/TC COMPANY PROFIT BANK CH. EXPENDITURE IN %AGE (1) RIL 29472973 36229982 881999728 7.45 (2) SARUP 21444000 6296000 305210000 9.09 (3) DELTAMEI 30206744 3848152 461900644 7.37 (4) GRAZIELLA 4894060 3851370 662410892 1,32 (5) MIRZA 285910000 137930000 2559310000 16.56 (6) WORLDWIDE 4711446 705473 113989001 4.75 (7) LIBERTY 19516284 88188867 2043067391 13.87 (8) MAYUR 39233958 3479817 239297057 17.85 (9) LAKHANI 4154162 6378348 440746785 2.39 (10) SUPER TANNERY 33090000 41450000 1969400000 3.78 (11) SUPER HOUSE 110610000 49710000 3050720000 5.26 INDUSTRY AVERAGE 8.22 4.4.3 AS PER THESE DETAILS, THE AVG. PLL (OP/TC) OF THE COMPARABLE COMPANIES (FOR THE A.Y. 2007 - 08) CO MES TO 8.22, WHEREAS THE PLL (OP/TC) FOR THE APPELLANT COMPANY COMES TO 10 7.45 . I HAVE VERIFIED THESE CALCULATIONS FROM THE BALANCE - SHEET OF EACH OF THESE COMPANIES AND THEY ARE PART OF THE APPEAL RECORDS. SINCE THE DIFFERENCE BETWEEN THE TWO PLIS IS WITHIN TH E RANGE OF +5% , NO ADJUSTMENT WAS REQUIRED TO BE MADE. THE ADJUSTMENT OF RS.57 , 07 , 130/ - MADE IS, THEREFORE, DELETED. THE A.O . /TPO MAY VERIFY THE CALCULATIONS. 7. DURING THE COURSE OF HEARING OF THE APPEAL, NO DEFECT IN THE WORKING OF THE CIT(A) IN ITS O RDER HAS BEEN POINTED OUT BY LEARNED D. R. HE SIMPLY PLACED RELIANCE UPON THE ORDER OF THE TPO AND THE ASSESSING OFFICER. NOTHING HAS BEEN PLACED TO JUSTIFY THAT THE TPO HAS RIGHTLY ADOPTED THE RESALE METHOD TO DETERMINE THE ARMS LENGTH PRICE WHEREAS TH E ASSESSEE IS 100% EXPORTER. SINCE THE CIT(A) HAS ADOPTED THE TNMM METHOD FOLLOWING THE METHOD ADOPTED BY TPO IN SUCCEEDING YEAR TO DETERMINE THE ARMS LENGTH PRICE, WE FIND NO INFIRMITY IN HIS ORDER. MOREOVER, HAVING NOTICED THE DIFFERENCE BETWEEN TWO PLIS IN THE RANGE OF +5%, THE CIT(A) HAS RIGHTLY DELETED THE ADDITIONS AS NO ADJUSTMENT WAS REQUIRED FOR SUCH DIFFERENCE. SINCE WE FIND OURSELVES IN AGREEMENT WITH CIT(A), WE CONFIRM THE SAME. 8. IN THE ASSESSMENT YEAR 2008 - 09, THE TPO HAS FOLLOWED THE TNMM METHOD AFTER REJECTING THE CUP METHOD FOR DETERMINING THE ARMS LENGTH PRICE BUT WHILE DETERMINING THE ARMS LENGTH PRICE, THE TPO HAS MADE CERTAIN ADJUSTMENTS RESULTING INTO ADDITION OF RS.2,23,73,153/ - . WHEN THE APPEAL WAS PREFERRED BEFORE THE CIT( A), THE ASSESSEE HAS POINTED OUT CERTAIN MISTAKES APPARENT IN THE CALCULATION OF THE TPO. IT WAS CONTENDED BY THE ASSESSEE THAT FOLLOWING THE TNMM METHOD, THE TPO WHILE ARRIVING AT THE FIGURE OF OPERATING COST, HAS NOT CONSIDERED A SUM OF RS.22,57,291/ - B EING THE VARIATION IN THE CLOSING STOCK. THE TPO HAS WORKED OUT THE ASSESSEES MARGIN AT 1.23% WHEREAS IF THE VARIATION IN CLOSING STOCK IS CONSIDERED, THE ASSESSEES MARGIN WOULD COME TO 9.56%. IT WAS FURTHER CONTENDED THAT IF THE AFORESAID FIGURE IS CO NSIDERED THEN THERE WOULD BE NO 11 REQUIREMENT OF ADJUSTMENT SINCE THE AVERAGE PLI OF THE COMPARABLES (AS COMPUTED BY THE TPO) IS 8.11%. HE HAS ALSO FURNISHED THE CORRECT CALCULATIONS AND POINTED OUT THE DIFFERENCE IN THE CALCULATIONS MADE BY THE TPO . THE S UBMISSIONS AND CALCULATIONS MADE BY THE ASSESSEE ARE RELEVANT TO UNDERSTAND THE ERROR APPARENT IN THE CALCULATION OF TPO THEREFORE, WE EXTRACT THE SAME AS UNDER: IN ADDITION TO THE STATEMENT OF FACTS, IT IS SUBMITTED THAT THE TPO HIMSELF WHILE PASSING TH E ORDER U/S 92CA(3) OF THE I.T. ACT HAS COMPUTED THE TOTAL ADJUSTMENT FOR THE PURPOSE OF INTERNATIONAL TAXATION AT RS.2,23,73,153/ - BY APPLYING TNMM METHOD. WHILE APPLYING THE AFORESAID METHOD, THE TPO WHILE ARRIVING AT THE FIGURE OF OPERATING COST, HAS NO T CONSIDERED A SUM OF RS.22,57,58,291 / - BEING THE VARIATION IN THE CLOSING STOCK. THE TPO HAS WORKED THE ASSESSEE'S MARGIN AT 1.23% WHEREAS IF THE VARIATION IN CLOSING STOCK IS CONSIDERED, THE ASSESSEE'S MARGIN WOULD COME TO 9.56%. IF THE AFORESAID FIGURE IS CONSIDERED THEN THERE WOULD BE NO REQUIREMENT OF ADJUSTMENT SINCE THE AVERAGE PLI OF THE COMPARABLES (AS COMPUTED BY THE TPO) IS 8.11%. THIS MISTAKE IS APPARENT FROM THE CALCULATION MADE BY TPO DONE ON PAGE NO. 5 OF THE TPO ORDER. THE ORDER PASSED BY TH E TPO IS ERRONEOUS. PARTICULARS AS PER APPELLANT AS PER TPO ---------------------------------- --------------------- --------------------- TOTAL INCOME 1,41,34,62,001 1,41,34,62,001 EXPORT SALE (84%) 1,19,30,30,814 1,19,30,30,814 EXPORT TO AE(25.25%) 30,48,35,492 30,48,35,492** TOTAL EXPENSES 1,32,49,15,473 1,55,06,73,764 (BEFORE FINANCE CHARGES) (THIS IS AFTER ADJUSTMENT ON ACCOUNT OF VARIATION OF CLOSING STOCK OF 22,57,58,291) EXPENSES FOR EXPORT (84%) 1,11,29,28,997 1,30,25,65,962 EXPENSES FOR EXPORT TO A.E.(25%) 27,82,32,249 32,56,41,490 TOTAL SALES TO A.E. 30,48,35,492 32,96,77,862 (*) OPERATING PROFITS 2,66,03,243 40,36,372** * PLI= OP (ON EXPORT TO AE) 2,66,03,243 X100 40,36,372 X100 TC 27,82,32,249 32,56,41,490 = 9.656% 1.23% (*) APPEARS TO BE A TYPOGRAPHICAL ERROR, IT SHOULD HAVE BEEN RS.3,48,35,492/ - AS PER ** (***) ARITHMETICAL MISTAKE. 12 ACCORDINGLY, IT IS P RAYED THAT THE ADJUSTMENT ORDERED TO BE MADE BY THE TPO TO THE EXTENT OF RS.2,23,73,153/ - BEING ALP ADJUSTMENT BE DELETED. 8.1 THESE CALCULATIONS WERE EXAMINED BY CIT(A) AND BEING CONVINCED WITH IT, THE CIT(A) WAS OF THE VIEW THAT THE CALCULATION MADE BY TPO OF THE PLIS (OP/TC) IN THE CASE OF THE ASSESSEE IS ERRONEOUS AS THE TPO HAS MADE FACTUAL AND CONCEPTUAL ERROR BY NOT CONSIDERING THE VARIATION IN CLOSING STOCK, WHICH IS ESSENTIAL IN DETERMINING THE CORRECT TOTAL COST AND OPERATIN G PROFITS. THE CIT(A) ACCORDINGLY DELETED THE ADDITIONS MADE ON THIS COUNT. THE RELEVANT OBSERVATIONS OF CIT(A) ARE ALSO EXTRACTED HEREUNDER FOR THE SAKE OF REFERENCE: 4.3.1 THE APPELLANT COMPANY HAD CERTAIN INTERNATIONAL TRANSACTIONS WITH ITS AES TO WHICH INDIAN TRANS FER PRICING REGULATION (CONTAINED IN SEC. 92 TO SEC. 92 F OF THE I . T. ACT) APPLY. IN ORDER TO ESTABLISH WHETHER SUCH TRANSACTIONS (BETWEEN THE APPELLANT COMPANY AND ITS A.ES ADHERED TO ARM'S LENGTH PRINCIPLE ( AS REQUIRED UNDER THE T.P. REGULATIONS), A TRA NSFER PRICING STUDY WAS UNDERTAKEN BY THE ASSESSEE . THE SAID REPORT IS PART OF THE ASSESSMENT RECORDS . 4.3.2 ON A REFERENCE MADE BY THE A.O., THE AUDIT OF THESE INTERNATIONAL TRANSACTIONS WAS UNDERTAKEN BY THE TPO , W HO AFTER GIVING DUE OPPORTUNITY TO THE ASSESSEE HAD PASSED AN ORDER U/S 92CA DATED 31/10/2011 WHEREIN CERTAIN ADJUSTMENTS WERE ORDERED. THE APPELLANT BEING AGGRIEVED IS IN APPEAL BEFORE THE UNDERSIGNED. 4.3.3 IN HIS ORDER, THE TPO HAS MADE THE FOLLOWING CALCULATION FOR DETERMINING THE PLI: ITEM AS PER THE TPO ------ ------------------- TOTAL INCOME 1,41,34,62,001 EXPORT SALE 1,19,30,30,814 EXPORT TO AES (25%) 30,48,35,492 EXPENSES TOTAL EXPENSES BEFORE FINANCE CHARGES 1,55,06,73,764 13 EXPENSES FOR EXPORT (84%) 1,30,25,65,961 EXPENSES FOR EXPORT TO A.E.(25%) 32,56,41,490 TOTAL SALES TO AE 32,96,77,862 ADD: EXPORT BENEFITS FOR CALCULATING OPERATING PROFITS FROM A.ES NIL ____________ TOTAL INCOME ON ACCOUNT OF EXPORT TO A.ES 32, 96,77,862 LESS: EXPENSES ATTRIBUTABLE TO EXPORT TO AE 32,56,41,490 OPERATING PROFITS = 40,03,672 PLI = OP = 40,03,672 X 100 TC 32,56,41,490 = 1.31% 4.3.4 I HAVE PERUSED THE ORDER OF THE TPO AND ALSO THE SUBMISSION MADE BY THE LEARNED A.R. IN THIS REGARD. AT THE OUTSET, IT MAY BE OBSERVED THAT THE CALCULATION MADE BY THE TPO OF THE PLI (OP/TC) IN THE CASE OF THE APPELLANT IS ERRONEOUS AS THE TPO HAS MADE A FACTUAL AND CONCEPTUAL ERROR BY NOT CONSIDERING THE VARIATION IN CLOSING STOCK (OF FINISHED STOCKS & W.I.P.) WHICH IS ESSENTIAL IN DETERMINING THE CORRECT TOTAL COST AND OPERATING PROFITS. IF THE VARIATION IN CLOSING STOCK OF RS.22,57,58,291/ - IS CONSIDER ED, THE TOTAL COST (BEFORE FINANCIAL CHARGES) WOULD COME TO RS.1,32,49,15,473/ - AS AGAINST RS.1,55,06,73,764/ - ADOPTED BY THE TPO. FURTHER, THERE IS A TYPOGRAPHICAL ERROR IN THE ORDER OF THE TPO WHEREIN EXPORT TO AES HAVE BEEN TAKEN AT RS.32,96,77,862/ - I NSTEAD OF RS.30,48,35,492/ - . THE COMPUTATION OF THE PLI (OP/TC) IN THE CASE OF THE APPELLANT WOULD BE AS UNDER: PARTICULARS AMOUNT TOTAL INCOME 1,41,34,62,001 EXPORT SALE (84%) 1,19,30,30,814 EXPORT TO AE (25.25%) 30,48,35,492 TOTAL EXPENSES 1,32,49,15,473 ( BEFORE FINANCE CHARGES) (THIS IS AFTER ADJUSTMENT ON ACCOUNT OF VARIATION O F CLOSING STOCK OF RS.22,57,58,291/ - ) EXPENSES FOR EXPORT (84%) 1,11,29,28,997 EXPENSES FOR EXPORT TO AE (25%) 27,82,32,249 TOTAL SALES TO AE 30,48,35,492 OPERATING PROFITS = 2,66,03,243 14 PLI = OP (ON EXPORT TO AE) 2,66,03,243 X 100 TC 27,82,32,249 = 9.56% 4.3.5 THE AVERAGE PLI OF OTHER COMPARABLES (AS COMPUTED BY THE TPO HIMSELF) COMES TO 8.11%. THE PLI OF THE APPELLANT COMPANY IS 9.56%, WHICH IS MORE THAN THE AVERAGE PLI OF THE COMPARABLE COMPANIES, THUS, THERE WAS NO OCCASION FOR THE TPO TO ORDER FOR ADJUSTMENTS. IN VIEW OF THE MATTER, THE ASSES SING OFFICER IS DIRECTED TO DELETE THE ADDITION MADE ON THIS ACCOUNT. 9. AGGRIEVED, THE REVENUE HAS PREFERRED AN APPEAL BEFORE THE TRIBUNAL AND PLACED RELIANCE UPON THE ORDER OF THE TPO AND ASSESSING OFFICER WHEREAS THE LEARNED COUNSEL FOR THE ASSESSEE BESIDES PLACING RELIANCE UPON THE ORDER OF CIT(A) HAS CONTENDED THAT IN THIS ASSESSMENT YEAR THE TPO HAS ADOPTED TNMM METHOD TO DETERMINE THE ARMS LENGTH PRICE AFTER REJECTING THE CUP METHOD ADOPTED BY THE ASSESSEE. BUT WHILE DETERMINING THE ARMS LENGTH PRICE, THE TPO HAS MADE FACTUAL ERROR IN THE CALCULATION BY NOT CONSIDERING THE VARIATION IN THE CLOSING STOCK. THE CIT(A) HAS REEXAMINED THE CALCULATIONS MADE BY THE ASSESSEE AS WELL AS TPO TO DETERMINE THE ARMS LENGTH PRICE AND BEING CONVINCED WITH THE FACTS THAT AN ERROR HAS CREPT IN THE ORDER OF THE TPO, THE CIT(A) HAS ACCE PTED THIS CALCULATION MADE BY THE ASSESSEE AND HE WAS ALSO OF THE VIEW THAT THE PLI OF THE ASSESSEE COMPANY IS 9.5%, WHICH IS MORE THAN THE AVERAGE PLI OF COMPARABLE COMPANY. THEREFORE, THERE WAS NO OCCASION FOR THE TPO FOR ADJUSTMENT. 10. HAVING CAREFUL LY EXAMINED THE ORDERS OF THE LOWER AUTHORITIES IN THE LIGHT OF THE RIVAL SUBMISSIONS, WE FIND THAT IN THIS ORDER, THE T.P.O. HIMSELF HAS ADOPTED THE TNMM METHOD FOR DETERMINING THE ARMS LENGTH PRICE BUT WHILE DETERMINING THE SAME HE HAS NOT TAKEN INTO A CCOUNT THE VARIATION IN CLOSING STOCK. BEFORE THE CIT(A), THE ASSESSEE TOOK A SPECIFIC PLEA THAT 15 WHILE DETERMINING THE ARMS LENGTH PRICE AS PER THE TNMM METHOD, THE TPO HAS NOT CONSIDERED A SUM OF RS.22,57,58,291/ - BEING VARIATION IN CLOSING STOCK IN OR DER TO ARRIVE ON THE FIGURE OF OPERATING COST. THE ASSESSEE HAS GIVEN THE FIGURE OF CORRECT CALCULATION BEFORE THE CIT(A) AND CIT(A) HAS EXAMINED BOTH THE CALCULATIONS I.E. ASSESSEE AS WELL AS TPO AND HAVING NOTICED THAT THERE WAS FACTUAL ERROR IN THE TPO S CALCULATION, THE CIT(A) HAS HELD THAT THE AVERAGE PLI OF OTHER COMPARABLES, AS COMPARED BY TPO HIMSELF, COMES TO 8.11% . SINCE THE PLI OF THE ASSESSEE IS 9.56%, WHICH IS MORE THAN THE AVERAGE PLI OF COMPARABLES, THERE WAS NO REASON FOR THE TPO FOR ANY A DJUSTMENT. NO DEFECT IN THE ORDER OF CIT(A) WAS POINTED OUT BY LEARNED D. R. THEREFORE, WE FIND OURSELVES IN AGREEMENT WITH HIS ORDER AND ACCORDINGLY WE CONFIRM THE SAME. 11. IN BOTH THE APPEALS, THE OTHER GROUNDS I.E. GROUND NO. 2 IN I.T.A. NO.389/LKW/2 013 AND GROUND NO. 1 IN I.T.A. NO.316/LKW/2013 RELATE TO THE DISALLOWANCE OF THE EXPENSES INCURRED ON STUDY TO ABROAD OF SHRI HAMMAD RAHAMAN, SON OF THE DIRECTOR AND SHRI EBBAD RAHMAN. IN THIS REGARD, OUR ATTENTION WAS INVITED TO THE ORDER OF THE TRIBUNAL FOR THE ASSESSMENT YEAR 2003 - 04 AND 2004 - 05 OF WHICH COPY IS PLACED ON RECORD WITH THE SUBMISSION THAT THE ISSUE WAS SQUARELY COVERED BY THE ORDER OF THE TRIBUNAL IN FAVOUR OF THE ASSESSEE. IN THAT ASSESSMENT YEAR, THE TRIBUNAL HAS CONFIRMED THE ORDER OF THE CIT(A) WHO HAS DELETED THE ADDITION MADE ON ACCOUNT OF DISALLOWANCE OF EXPENSES INCURRED ON STUDY OF THE AFORESAID PERSONS. FOR THE SAKE OF REFERENCE, WE EXTRACT THE RELEVANT PORTION OF THE ORDER OF THE TRIBUNAL AS UNDER: 15. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. THIS ISSUE WAS DECIDED BY THE CIT (A) AS PER PARA 8 & 9 OF HIS ORDER AND FOR THE SAKE OF READY REFERENCE, THE SAME ARE REPRODUCED BELOW: 16 8. I HAVE CONSIDERED THE FACTS AND CIRCUMSTANCES OF THE CASE AND SUBMISSIONS OF THE APPELLANT. ADMITTEDLY, THE AMOUNT OF RS.25,49,622/ - HAS BEEN INCURRED ON THE TECHNICAL EDUCATION OF MR. H. RAHMAN. THE AO HAS NOT QUESTIONED THE GENUINENESS OF THE EXPENDITURE . SAME HAS BEEN DISALLOWED U/S 40A(2)(B) OF THE I.T. ACT. HOWEVER, AS FAR AS THE AMOUNT OF EXPENDITURE ON THE TECHNICAL EDUCATION OF MR. H. RAHMAN IS CONCERNED, IT IS NOT RECORDED BY AO THAT AMOUNT OF RS.25,49,622/ - WAS 'EXCESSIVE' IN RELATION TO ANY OTHE R SUCH CASE OF THE EXPENDITURE ON THE PROFESSIONAL COURSE OF B. TECH. IN U.K. FROM UNIVERSITY, COLLEGE, NORTHAMPTON (U.K.). THE EXPENDITURE INVOLVING FEES, ETC. IS PRIMA FACIE AS PER THE RATES AND TARIFF OF THE SAID UNIVERSITY AND SAID COURSE. IT IS NOT A CASE WHERE THE EXPENDITURE IS 'EXCESSIVE' AS COMPARED TO ANY OTHER PERSON ACQUIRING THIS DEGREE IN THE SAID INSTITUTION. THEREFORE, APPLICATION OF SECTION 40A(2)(B) DOES NOT SEEM TO BE PROPER, UNLESS THERE IS SPECIFIC PAYMENT MADE BY APPELLANT SHOWING THAT SUCH EXPENDITURE IS IN EXCESS AS COMPARED TO OTHERS MADE BY THEM IN THE SAME INSTITUTION FOR THE SAME COURSE. NOW POSSIBLY, THE AO HAS CONSIDERED THE EXPENDITURE AS BEING FOR NON BUSINESS PURPOSE. BECAUSE MR. H. RAHMAN HAPPENS TO BE AN 'SPECIFIED PERSON' WITHIN THE MEANING OF SECTION 40A(2)(B), PERHAPS IT HAS MISLEAD THE AO TO MAKE THE DISALLOWANCE WITHOUT BRINGING OUT ANYTHING ON RECORD TO SHOW THAT THE EXPENDITURE AS SUCH WAS EXCESSIVE AND UNREASONABLE. THE ALLOWABILITY OF THIS EXPENDITURE U/S 37 OF THE I.T.ACT HAS NOT BEEN LOOKED INTO BY AO. WHICH WAS REQUIRED BECAUSE THE PAYMENT MADE FOR EDUCATION OF MR. H. RAHMAN IS NOT EXCESSIVE AND NOT UNREASONABLE FACTS, AS DISCUSSED ABOVE, HENCE QUESTION OF APPLICABILITY OF SECTION 40A(2)(B) DOES NOT ARISE. AS FAR AS ALLOWABILITY OF THE SAID EXPENDITURE U/S 37 OF THE I.T. ACT IS CONCERNED, THE SAME HAS TO BE LOOKED INTO IN THE PERSPECTIVE OF THE BUSINESS OF THE COMPANY AND POSITION OF MR. H. RAHMAN IN THIS CONTEXT. IT IS ON RECORD THAT MR. H. RAHMAN WAS APPOINTED AN EXECUTIVE OF THE COMPANY W.E.F. 1.3.2003 AND HE WAS ALSO POSTED IN U.K. BY THE COMPANY FOR PERFORMING CERTAIN DUTIES/JOB RELATING TO BUSINESS PROMOTION AND MONITORING OF THE SALES AND EXPANDING THE BUSINESS. THE COPY OF THE BOARD RESOLUTION IN THIS BEHALF IS ON RECORD. THEREFORE, WHAT COMES OUT IS THAT MR. H. RAHMAN WAS 17 ALSO WORKING IN THE CAPACITY OF AN EXECUTIVE OF THE COMPANY DURING THE PERIOD. MOST IMPORTANTLY, THE DEGREE OF B.TECH ACQUIRED BY HIM RELATES TO LINE OF THE BUSINESS I.E. LEATHER, OF THE AP PELLANT COMPANY AND IT CERTAINLY HAS SOME BENEFITS TO THE BUSINESS OF THE COMPANY ALSO. THE PLACE OF POSTING OF MR. H. RAHMAN IS ALSO RELEVANT I.E. U.K. WHERE MORE THAN 50% OF THE TURNOVER OF THE COMPANY IS AFFECTED. ALL THESE CIRCUMSTANCES SHOW THAT THER E IS NO ELEMENT OF PERSONAL BENEFIT AND CONSIDERATION BEING RELEASED TO MR. H.RAHMAN EXCLUSIVELY. THE COMPETITIVE EXPORT MARKET AND THE REQUIREMENT OF THE APPELLANT COMPANY TO REMAIN UPDATED IN TERMS OF TECHNOLOGY AND SUPERIOR MAN POWER EQUIPPED AND SKILLE D TO ENSURE FUTURE GROWTH AND DEVELOPMENT OF BUSINESS IS A VALID BUSINESS CONSIDERATION AND VERY MUCH A PART OF THE BUSINESS EXPEDIENCY. THE DECISION IN THE CASE OF DCM VS CIT 158 ITR, CIT VS. TELCO 123 ITR AND HINDUSTAN ALUMINUM VS. CIT 159 ITR HAVE LAID DOWN THAT 'THE EXPENDITURE/PAYMENT ON 'SENDING EMPLOYEES ABROAD FOR TRAINING', OR 'TO STUDY THE ADVANCES MADE IN FOREIGN COUNTRIES' IS ALLOWABLE AS REVENUE BUSINESS EXPENDITURE'. IT WAS HELD IN J.B.ADVANI & CO. LTD. V. CIT [2005] 1 SOT 830 (MUM.) - 'FOREIG N STUDY EXPENSES INCURRED BY A COMPANY IN RESPECT OF AN EMPLOYEE CANNOT BE DISALLOWED SIMPLY BECAUSE EMPLOYEE HAPPENS TO BE RELATIVE OF A DIRECTOR. IN THE INSTANT CASE, X WAS NOT ONLY THE DAUGHTER OF ONE OF DIRECTORS OF THE ASSESSEE COMPANY BUT ALSO AN EMP LOYEE OF THE ASSESSEE COMPANY. THE ASSESSEE COMPANY IS ON A BETTER FOOTING IN THE INSTANT CASE. NOT ONLY THAT, S, ON RETURNING TO INDIA, CONTINUED TO WORK FOR THE ASSESSEE IN COMPLIANCE OF THE AGREEMENT SHE HAD ENTERED INTO WITH IT BEFORE LEAVING INDIA. SH E HAS BEEN FURTHER MADE AS A DIRECTOR OF THE ASSESSEE COMPANY. THEREFORE, THE RELATION OF X WITH ONE OF THE DIRECTORS OF THE ASSESSEE COMPANY AS SUCH NEED NOT DISQUALIFY HER FROM BEING SENT ABROAD FOR HIGHER STUDIES BY THE ASSESSEE COMPANY'. THEREFORE, IN VIEW OF ABOVE DISCUSSION, THE AO IS DIRECTED TO ALLOW EXPENDITURE OF RS.25,49,622/ - . 9. SIMILAR ARE THE FACTS IN RESPECT OF SALARY PAYMENT OF RS.2,28,000/ - WHERE THE AO HAS DISALLOWED THE AMOUNT ON THE GROUND THAT THE REMUNERATION PAID TO MR. 18 H.RAHMAN WA S NOT FOR BUSINESS PURPOSE BECAUSE AT THAT TIME HE WAS PURSUING TECHNICAL EDUCATION. HOWEVER, THE AO HAS FAILED TO APPRECIATE THAT THE SAID MR. H.RAHMAN WAS EXECUTIVE OF THE COMPANY AND FROM THE POINT VIEW OF APPELLANT COMPANY, EVEN IF HE WAS PURSUING TECH NICAL EDUCATION, HE WAS ENGAGED IN THE PERFORMANCE OF THE DUTY ASSIGNED BY THE EMPLOYER. MORE THAN THIS, IT IS CLEAR THAT MORE THAN 50% OF THE TURNOVER OF THE COMPANY IS IN U.K. WHERE THE PERSON WAS LEARNING HIS TECHNICAL EDUCATION. PRIMA - FACIE THERE SEEMS TO BE A RELATION IN THE PRESENCE OF MR. H. RAHMAN IN U.K. WHO WAS PURSUING HIS TECHNICAL EDUCATION, AND ALSO WAS TO INTERACT AND CONTRIBUTE TO THE BUSINESS ACTIVITIES OF THE COMPANY IN DIRECT OR INDIRECT MANNER, EVEN BY PROVIDING INFORMATION OF TRADE, INT ERACTING WITH CUSTOMERS, OR/AND BEING PERSON ON BEHALF OF THE COMPANY FOR REQUIRED BUSINESS INTERACTION IN U.K. THUS, IN VIEW OF ABOVE DISCUSSION, BOTH THE EXPENSES ARE ALLOWABLE U/S 37 OF THE I.T. ACT AND AS FAR AS SECTION 40A(2)(B) IS CONCERNED, SAME IS NOT APPLICABLE BECAUSE THE ELEMENT OF 'EXCESSIVENESS' AND 'UNREASONABLENESS' IS NOT PRESENT AND/OR HAS NOT BEEN EXAMINED AND RECORDED BY AO. THE AO IS DIRECTED TO DELETE THE ADDITION OF RS.2,28,000/ - . 15.1 FROM THE ABOVE PARAS FROM THE ORDER OF THE LEARNED CIT(A), WE FIND THAT A CLEAR FINDING IS GIVEN BY CIT(A) THAT NO FINDING HAS BEEN RECORDED BY THE ASSESSING OFFICER THAT THE EXPENDITURE CLAIMED BY THE ASSESSEE WAS EXCESSIVE IN RELATION TO ANY OTHER SUCH CASE OF THE EXPENDITURE ON THE PROFESSIONAL COURSE OF B. TECH. IN U.K. FROM UNIVERSITY, COLLEGE, NORTHAMPTON (U.K.). IN THE ABSENCE OF ANY SUCH FINDING OF THE ASSESSING OFFICER ON THE BASIS OF SOME MATERIAL AVAILABLE ON THE RECORD THAT THE EXPENSES CLAIMED BY THE ASSESSEE ARE EXCESSIVE OR UNREASONA BLE, THE DISALLOWANCE MADE BY THE ASSESSING OFFICER U/S 40A(2)(B) IS NOT SUSTAINABLE. HENCE, WE DO NOT FIND ANY REASON TO INTERFERE IN THE ORDER OF CIT(A). THIS GROUND OF THE REVENUE IS DISMISSED. 12. SINCE THE IMPUGNED ISSUES ARE SQUARELY COVERED BY THE ORDER OF THE TRIBUNAL, WE CONFIRM THE ORDER OF CIT(A) FOLLOWING THE SAME. 19 13. THE OTHER ISSUE IN THESE GROUNDS RELATES TO THE REMUNERATION OF RS.1,20,000/ - PAID TO SHRI HAMMAD RAHAHAM. THE ASSESSEE HAS CLAIMED THE PAYMENT OF RS.3,00,000/ - AS REMUNERATION TO SHRI HAMMAD RAHAHAM, WHICH WAS DISALLOWED BY ASSESSING OFFICER ON THE GROUND THAT SHRI HAMMAD RAHAHAM WAS STUDYING IN ABROAD AND WAS DOING WHOLE TIME COURSE OF TECHNICAL EDUCATION THEN HOW HE COUL D SPARE TIME FOR BUSINESS ACTIVITIES. THE ASSESSEE PREFERRED AN APPEAL BEFORE CIT(A) WITH THE SUBMISSIONS THAT THERE IS NO BAR IN PAYMENT OF SALARY TO AN EMPLOYEE WHO WAS DOING A PARTICULAR TECHNICAL COURSE FOR THE BENEFIT OF THE ASSESSEE COMPANY. THE CI T(A) HAS REEXAMINED THE ENTIRE ISSUE AND ALLOWED THE SALARY OF RS.1,20,000/ - PER MONTH. AGAINST THE ALLOWANCE OF RS.1,20,000/ - , THE REVENUE IS IN APPEAL BEFORE US AND PLACED RELIANCE ON THE ORDER OF THE ASSESSING OFFICER WHEREAS LEARNED COUNSEL FOR THE AS SESSEE HAS PLACED RELIANCE ON THE ORDER OF CIT(A) THAT THE PAYMENT OF SALARY WAS MADE AS PER THE RESOLUTION OF THE BOARD. 1 4 . HAVING EXAMINED THE ORDER OF CIT(A), WE FIND THAT SHRI HAMMAD RAHAHAM IS ALSO ONE OF THE DIRECTORS OF THE ASSESSEE COMPANY WHO W AS SENT ABROAD FOR DOING A TECHNICAL COURSE. UNDISPUTEDLY, SHRI HAMMAD RAHAHAM WAS NOT AVAILABLE IN INDIA FOR RENDERING ANY SERVICES TO THE ASSESSEE COMPANY THEREFORE, ANY PAYMENT OF REMUNERATION FOR THE SERVICES RENDERED BY HIM FOR THE COMPANY, CANNOT BE ALLOWED IN THE LIGHT OF THE FACT THAT THE ASSESSEE HAS BORNE ALL THE EXPENSES FOR HIS TECHNICAL COURSE TO BE UNDERTAKEN IN ABROAD. SINCE THERE IS NO EVIDENCE THAT HE HAS RENDERED ANY SERVICES TO THE ASSESSEE COMPANY, WE ARE OF THE VIEW THAT NO REMUNERATI ON CAN BE PAID TO THE ASSESSEE ONLY FOR THE SIMPLE REASON THAT THE BOARD HAS PASSED A RESOLUTION IN THIS REGARD. ONLY THOSE EXPENSES CAN BE ALLOWED, WHICH ARE INCURRED FOR THE BUSINESS PURPOSES OF THE ASSESSEE. WE, THEREFORE, DO NOT AGREE WITH THE FINDIN G OF CIT(A) AND ACCORDINGLY SET ASIDE HIS ORDER IN THIS REGARD AND RESTORE THAT OF THE ASSESSING OFFICER. 20 1 5 . GROUND NO. 3 IN I.T.A. NO.389/LKW/2013 RELATES TO THE DISALLOWANCE OF RS.6,00,000/ - BEING EXCESS REMUNERATION PAID TO THE DIRECTORS OF THE ASSESS EE COMPANY. 1 6 . DURING THE COURSE OF HEARING, OUR ATTENTION WAS INVITED THAT THE IMPUGNED ISSUE IS COVERED BY THE ORDER OF THE TRIBUNAL IN THE ASSESSEES OWN CASE FOR ASSESSMENT YEAR 2005 - 06 IN WHICH THE IDENTICAL ISSUE WAS RAISED AND WAS DECIDED IN FAVOU R OF THE ASSESSEE, COPY OF WHICH IS PLACED ON RECORD. SINCE THE ISSUE IS COVERED BY THE ORDER OF THE TRIBUNAL IN FAVOUR OF THE ASSESSEE, WE FIND NO INFIRMITY IN THE ORDER OF CIT(A) AND ACCORDINGLY WE CONFIRM THE SAME. 16. IN THE RESULT, THE APPEALS OF THE REVENUE ARE PARTLY ALLOWED. ORDER WAS PRONOUNCED IN THE OPEN COURT ON 1 2 / 06 /2014 ) SD/. SD/. ( A. K. GARODIA ) (SUNIL KUMAR YADAV) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED: 1 2 / 06 /2015 *C.L.SINGH COPY OF THE ORDER FORWARDED TO : 1. THE APPELLANT 2. THE RESPONDENT. 3. CONCERNED CIT 4. THE CIT(A) 5. D.R., I.T.A.T., LUCKNOW ASSTT. REGISTRAR