M/s Lotus Machines Pvt. Ltd., Chandigarh V. ITO, W-1(2), Chandigarh

ITA 487/CHANDI/2019

• Counselvise Citation: [2021] 109 COUNSELVISE.COM (IT) 6338 (ITAT-CHANDIGARH)
• Duration Of Justice: 1 year(s) 9 month(s) 6 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 22-01-2021
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Next Hearing Date: 28-10-2020
• Assessment Year: 2013-2014
• Appeal Filed On: 16-04-2019
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: ARVIND SUDARSHAN
• Keywords: Gross profit estimation; Fair market value; Corroborative evidences
• Section: 143(3); 250; 80IC; 80IC; 13

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL, CHANDIGARH BENCH A , CHANDIGARH (VIRTUAL COURT) , ! ' # $ %! , &' BEFORE SHRI SANJAY GARG, JUDICIAL MEMBER AND SMT.ANNAPURNA GUPTA, ACCOUNTANT MEMBER ./ ITA NO.487/CHD/2019 / ASSESSMENT YEAR : 2013-14 M/S LOTUS MACHINES PVT. LTD. C/O SH. PARIKSHIT AGGARWAL, CA, H.NO. 1238, SECTOR 22B, CHANDIGARH THE ITO, W-1(2) SECTOR-17, CHANDIGARH ./PAN NO: AAACL2508D /APPELLANT /RESPONDENT /ASSESSEE BY : SHRI PARIKSHIT AGGARWAL, C.A ! / REVENUE BY : SHRI ARVIND SUDARSHAN, JCIT ' # $ /DATE OF HEARING : 28/10/2020 %&'( $ /DATE OF PRONOUNCEMENT:. 22/01/2021 &( /ORDER PER ANNAPURNA GUPTA, ACCOUNTANT MEMBER : THE PRESENT APPEAL HAS BEEN FILED BY THE ASSESSEE AGAINS T THE ORDER PASSED BY THE LD. COMMISSIONER OF INCOME TAX (APPEALS)-1, CHANDI GARH(HEREINAFTER REFERRED TO AS CIT(A)] U/S 143(3) OF THE INCOME TAX ACT,1961(IN SHOR T REFERRED TO AS ACT) DT.05/03/2019 RELATING TO ASSESSMENT YEARS(A.Y)2012- 13 & 2013-14. 2. THE SOLITARY ISSUE IN THE PRESENT APPEAL RELATES TO THE ADDITION MADE BY INVOKING THE PROVISION OF SECTION 40A(2)(B) OF THE ACT, HOLDING THE PURCHASES MADE BY THE ASSESSEE FROM RELATED PARTY TO BE NOT AT ARMS LENGTH OR FAIR MARKET VALUE (FMV) AND 2 MAKING ADJUSTMENT THERETO TO THE EXTENT OF RS. 82,89,57 6/- RESULTING IN ADDITION TO THE SAID EXTENT TO THE INCOME OF THE ASSESSEE THE SOLITARY EFFECTIVE GROUND RAISED BY THE ASSESSEE I N THIS REGARD BEFORE US, READS AS UNDER: 2 . THAT ON LAW, FACTS AND CIRCUMSTANCES OF THE C ASE, THE WORTHY CIT(A) HAS ERRED IN CONFIRMING THE ACTION OF LD. A.O. IN MAKING ADDITIO N OF RS. 82,89,576/- U/S 40A(2)(B) OF THE ACT IN RESPECT OF PURCHASES OF RS. 3,38,35,000/- MA DE FROM A RELATED PARTY EVEN WHEN THE PURCHASES WERE MADE AT REASONABLE RATES UNDER CIRCU MSTANCES AND COMPLETE EXPLANATION FOR THE SAME WAS FILED. 3. THE BRIEF FACTS RELATING TO THE ISSUE ARE THAT THE A SSESSEE COMPANY IS ENGAGED IN THE BUSINESS OF MANUFACTURING OF SECURITY EQUIPMENT. DU RING ASSESSMENT PROCEEDINGS THE ASSESSING OFFICER (AO) NOTED THAT THE GROSS PROFIT (GP) RATIO SHOWN BY THE ASSESSEE IN THE IMPUGNED YEAR WAS LOWER AS COMPARED TO THE LAST YEAR AND ACCORDING TO THE AO THE SAME WAS ON ACCOUNT OF PURCHASES MADE FROM THE S ISTER CONCERN OF THE ASSESSEE, M/S FUTURE TECHNOLOGY, AT UNREASONABLE RATES . THE AO ACCORDINGLY CONFRONTED THE SAME TO THE ASSESSEE IN RESPONSE TO WHICH DE TAILED SUBMISSIONS WERE FILED BY THE ASSESSEE JUSTIFYING BOTH THE FALL IN GP AND THE REASONABLENESS OF THE RATES AT WHICH THE PURCHASES WERE MADE FROM THE SISTER CONCERN. THE AO WAS NOT SATISFIED WITH THE SAME AND HELD THAT THE ASSESSEE HAD PURCHASED ITEMS A T VERY HIGH AND UNREASONABLE RATES FROM THE RELATED PARTY. THE AO FURTHE R NOTED THAT THE ASSESSEE HAD EARNED PROFIT OF ONLY 5.7% ON THE SALE OF THE SAID ITE MS WHICH WERE BOUGHT FROM THE SISTER CONCERN. HE ACCORDINGLY HELD THAT THE SISTER CONC ERN OUGHT TO HAVE EARNED PROFIT TO THIS EXTENT ONLY ON THE SALES MADE TO THE ASSESSEE AND APPLYING THIS RATE OF 5.7% TO THE MANUFACTURING COST OF SISTER CONCERN,HE WORKED OUT THE FMV OF THE PURCHASE PRICE AT RS. 2,55,45,424/- AS AGAINST RS. 3,38,35,000/- AT WHICH IT WAS ACTUALLY TRANSACTED BY THE ASSESSEE. THE DIFFERENCE OF RS. 82,89,576/- WAS AC CORDINGLY TREATED AS UNREASONABLE EXPENDITURE ON ACCOUNT OF INFLATED PURCHASES IN THE HANDS OF THE ASSESSEE AS PER SECTION 40A(2)(B) OF THE ACT AND ADDITION MADE OF THE SA ME TO THE INCOME OF THE ASSESSEE. THIS ADDITION WAS VEHEMENTLY AGITATED BEFORE THE LD. C(A) WHO WAS NOT CONVINCED WITH THE ARGUMENTS OF THE ASSESSEE AND THEREFORE HE UPHELD THE ORDER OF THE AO , DISMISSING THE APPEAL OF THE ASSESSEE. 3 4. BEFORE US, LD. COUNSEL FOR THE ASSESSEE REFERRED TO THE DETAILED SUBMISSIONS MADE BEFORE THE LD. C(A) REPRODUCED AT PARA 13.1 OF HIS OR DER AND JUSTIFIED THE PURCHASES MADE FROM THE SISTER CONCERN STATING AS UNDER: 1. THAT THE GP EARNED BY THE SISTER CONCERN DURING THE IMPUG NED YEAR WAS CONSISTENT WITH THAT EARNED IN THE PRECEDING YEARS AND HAD FURTHER B EEN ACCEPTED UNDER REGULAR ASSESSMENT FRAMED UNDER 143 (3) OF THE ACT. TH EREFORE CLEARLY THE SALES MADE BY THE SISTER CONCERN TO THE ASSESSEE WAS AT ARMS LENGTH / FMV. OUR ATTENTION WAS DRAWN TO THE GROSS MARGIN EARNED BY THE SC M/S M/S FUTURE TECHNOLOGY IN THE IMPUGNED YEAR AND THE PRECEDING YEAR REPRODUCED AT PAG E 13 OF CIT(A) ORDER AS UNDER: M/S FUTURE TECHNOLOGIES HAS HISTORY & EXPERIENCE OF MANUFACTURING & SUPPLY OF SECURITY EQUIPMENTS TO MINISTRY OF DEFENCE. ITS ESTABLISHED & ACCEPTED GP RATE IN LAST 3 YEARS IS AS UNDER: A. Y. TURNOVER (IN LACS) GP RATE (%) 2011-12 812.93 49.08% 2012-13 474.63 39.42% 2013-14 769.93 35.51% 2. THAT THE ASSESSEE COMPANY HAD ONLY ACTED AS A TRADER PR OCURING ORDER AND SUPPLYING GOODS TO THE CUSTOMER ,WHILE THE SISTER CONCER N HAD MANUFACTURED THE GOODS, HAVING THE NECESSARY EXPERTISE ,TECHNOLOGY ,SKILL AND FACILITIES TO DO SO AND WITH A HISTORY OF ACCEPTED MARGIN OF THE SISTER CONCERN AT 30%,IT HAD CHARGED ONLY 24% PASSING ON THE BALANCE I.E APPROX 5.5 % TO THE ASSE SSEE,THE GP EARNED BY THE ASSESSEE DURING THE YEAR, IN THE IMPUGNED TRANSACTION, I .E LESS THAN THE NORMAL MARGIN ,THUS JUSTIFYING THE REASONABLENESS OF THE PRICE AT WHICH THE TRANSACTION WAS UNDERTAKEN. THE RELEVANT SUBMISSIONS IN THIS REGARD ARE A S UNDER: 13.1 PER CONTRA: IN RESPONSE TO THE APPEAL FILED BY THE APPELLANT U/ S 250 OF THE ACT, AUTHORIZED REPRESENTATIVE (IN SHORT 'LD. AR') FILED WRITTEN SUBMISSION ON BEHALF OF THE ASSESSEE AS UNDER:- '1. THE APPELLANT IS A COMPANY & IS ENGAGED IN MANU FACTURING OF SECURITY EQUIPMENTS. 2. THE APPELLANT PROCURES ORDER FOR SUPPLY OF ENGINEER ING GOODS. 3. THE ONLY QUESTION INVOLVED IN PRESENT APPEAL IS PRI CING ARRANGEMENT OF GOODS PURCHASED BY APPELLANT FROM M/S FUTURE TECHNOLOGIES (SISTER CONCERN). SH. R.K. GUPTA IS THE DIRECTOR OF APPELLANT COMPANY & HIS SON SH.AMIT GUPTA IS PROPRIETOR OF M/S FUTURE TECHNOLOGIES. 4. M/S FUTURE TECHNOLOGIES IS A MANUFACTURING CONCERN WHOSE PROFIT IS DEDUCTIBLE U/S 80IC OF THE ACT SINCE ITS UNIT IS IN HIMACHAL PRADE SH. ITS ASSESSMENT FOR THE YEAR IN QUESTION 4 WAS ALSO COMPLETED U/S 143(3) BY THE SAME ASSESSING OFFICER AT OR AROUND ALMOST THE SAME TIME BY PASSING ORDER U/S 143(3). QUA THE ISSUE IN PRESENT APPEAL, NO ADDITION OR ADVERSE INFERENCE WAS MADE IN ASSESSMENT OF M/S FUTURE TECH NOLOGIES. 5. M/S FUTURE TECHNOLOGIES HAS HISTORY & EXPERIENCE OF MANUFACTURING & SUPPLY OF SECURITY EQUIPMENTS TO MINISTRY OF DEFENCE. ITS EST ABLISHED & ACCEPTED GP RATE IN LAST 3 YEARS IS AS UNDER: A. Y. TURNOVER (IN LACS) GP RATE (%) 2011-12 812.93 49.08% 2012-13 474.63 39.42% 2013-14 769.93 35.51% 6. DURING THE YEAR IN QUESTION, THE APPELLANT COMPANY GOT SOME ORDER FROM MINISTRY OF DEFENCE FOR SUPPLY OF CERTAIN SECURITY EQUIPMENTS. M/S FUTURE TECHNOLOGIES HAD THE EXPERIENCE, MANUFACTURING FACILITIES, RESOURCES & C APABILITY TO EXECUTE THE ORDER WITHIN SPECIFIED LIMITED TIME. THE APPELLANT COMPANY COMPL ETELY LACKED IN ALL SUCH FACILITIES & RESOURCES. THEREFORE, IT OUTSOURCED THE MANUFACTURI NG PART OF THE ORDER TO M/S FUTURE TECHNOLOGIES AT AGREED PRICE BETWEEN THE PARTIES. A TABULATION SHOWING PRICE CHARGED FROM MINISTRY OF DEFENCE, PRICE PAID TO M/S FUTURE TECHNOLOGIES, MARGIN RETAINED BY THE ASSESSEE, COST OF THE RELEVANT PRODUCTS OF FUTURE T ECHNOLOGIES & GROSS MARGIN EARNED BY M/S FUTURE TECHNOLOGIES IS ENCLOSED. 7. IT IS AN UNDISPUTED FACT THAT THE APPELLANT PURCHAS ED GOODS WORTH RS.338.35 LACS FROM M/S FUTURE TECHNOLOGIES & SOLD THEM TO MINISTRY OF DEFENCE AT RS.357.80 LACS EARNING MARGIN OF APPROXIMATELY 5.50%. EXCEPT FORM PROCURIN G ORDER & GETTING PRODUCTS MANUFACTURED FROM FUTURE TECHNOLOGIES, APPELLANT CO MPANY DID NOT DO ANY VALUE ADDITION TO THE PRODUCT & DID NOT INCUR ANY EXPENSE FOR SUPPLY OF THIS PRODUCT. IN RESPECT OF THIS ORDER, M/S FUTURE TECHNOLOGIES EARNED GROSS MARGIN OF APPROXIMATELY 24%. 8. ALL THE ABOVE FACTS ARE TOTALLY UNDISPUTED. 9. HOWEVER, LD. A.O. HAS HELD THAT THE APPELLANT WITH A VIEW TO LOWER ITS GROSS MARGIN HAS PASSED ON HIGHER PROFIT TO ITS SISTER CONCERN AS TH E PROFIT OF SAID SISTER CONCERN WAS ELIGIBLE OF DEDUCTION U/S 80IC. HE HAS HELD THAT M/S FUTURE TECHNOLOGIES SHOULD HAVE RETAINED ONLY 5.7% AS MARGIN & BALANCE SHOULD HAVE BEEN EARNED BY APPELLANT COMPANY. BY WAY OF THIS, HE MADE THE IMPUGNED ADDITION OF RS. 82,89,57 6/-. 10. COPIES OF RELEVANT SUBMISSIONS & DOCUMENTS FILED BE FORE A.O. ARE ENCLOSED. 11. THE MAKING OF ABOVE ADDITION IS AGAINST THE PROVISI ONS OF THE ACT. IF A.O. IS OF OPINION THAT CERTAIN PURCHASES MADE FROM RELATED PARTY HAVE BEEN MADE AT EXCESSIVE & UNREASONABLE PRICES, THE ONLY SECTION WHICH GIVES H IM POWER TO DISALLOW THE EXCESSIVE & UNREASONABLE PORTION IS SEC 40A(2)(A). THE RELEVANT EXTRACT OF THIS SEC IS UNDER ' WHERE THE ASSESSEE INCURS ANY EXPENDITURE IN RESP ECT OF WHICH PAYMENT HAS BEEN OR IS TO BE MADE TO ANY PERSON REFERRED TO IN CLAUSE (B) OF THIS SUB-SECTION, AND THE ASSESSING OFFICER IS OF OPINION THAT SUCH EXPENDITURE IS EXCE SSIVE OR UNREASONABLE HAVING REGARD TO THE FAIR MARKET VALUE OF THE GOODS, SERVICES OR FAC ILITIES FOR WHICH THE PAYMENT IS MADE OR THE LEGITIMATE NEEDS OF THE BUSINESS OR PROFESSION OF THE ASSESSEE OR THE BENEFIT DERIVED BY OR ACCRUING TO HIM THERE FROM, SO MUCH OF THE EXPEN DITURE AS IS SO CONSIDERED BY HIM TO BE EXCESSIVE OR UNREASONABLE SHALL NOT BE ALLOWED AS A DEDUCTION ' IT IS EVIDENT THAT DISALLOWANCE U/S 40A(2)(A) CANNO T BE MADE UNLESS THE EXPENSE IS EXCESSIVE OR UNREASONABLE HAVING REGARD TO: A) FMV OF GOODS; B) LEGITIMATE NEEDS OF BUSINESS OF ASSESSEE; AND C) BENEFIT DERIVED BY OR ACCRUING TO ASSESSEE. 5 12. COMPARING THE FACTS OF PRESENT CASE AND THE RELEVAN T PROVISION OF SEC 40A(2)(A), THE IMPUGNED ADDITION DESERVES TO BE DEL ETED DUE TO FOLLOWING COUNTS:- 1) THE TOTAL GROSS MARGIN FROM ORDER OF MINISTRY OF DE FENCE WAS 30%. OUT OF WHICH 24% WAS EARNED BY M/S FUTURE TECHNOLOGIES & REST BY APPELLA NT COMPANY . THE APPELLANT COMPANY ONLY ACTED AS A TRADER WHEREIN IT ONLY PROCURED THE ORDER & SUPPLIED THE GOODS TO CUSTOMER. AS AGAINST THIS, M/S FUTURE TECHNOLOGIES USED ITS EXPERIENCE, RESOURCES, FACILITIES, SKILLS TO MANUFACTURE THE RELEVANT PRODUCT. IT HAD ESTABLISHED & ACCEPTED HISTORY OF CHARGING GROSS MARGIN IN EXCESS OF 30% FROM UNRELAT ED CUSTOMERS. IT ONLY CHARGED MARGIN OF APPROXIMATELY 24% FROM THE APPELLANT COMPANY. TH EREFORE, WHEN THE APPELLANT ONLY ACTED AS A TRADER & RELATED PARTY USED ITS INFRASTR UCTURE TO MANUFACTURE THE PRODUCT & CHARGED A MARGIN WHICH WAS LESS THAN WHAT IT WAS CH ARGING FROM UNRELATED CUSTOMERS, IT IS NOTHING BUT A CASE OF PURCHASE OF GOODS FROM RELATE D PARTY AT EVEN LESSOR THEN ITS FAIR MARKET VALUE OF GOODS. THEREFORE, NO DISALLOWANCE U /S 40A(2)(A) SHOULD HAVE BEEN MADE. 2) THE APPELLANT COMPANY GOT ORDER FORM MINISTRY OF DE FENCE FOR SUPPLY OF RELEVANT ITEMS, BUT DID NOT HAVE RELEVANT EXPERIENCE, RESOUR CES & MANUFACTURING FACILITIES TO SUPPLY PRODUCT IN SHORT SPAN OF TIME OF LESS THAN 2 MONTHS . AS AGAINST THIS, M/S FUTURE TECHNOLOGIES HAD ALL SUCH EXPERIENCE, RESOURCES, CAPABILITY & CA PACITY TO MANUFACTURE SUCH PRODUCTS & EXECUTE SUCH HIGH VOLUME OF ORDER IN SUCH SHORT S PAN OF TIME. CONSIDERING ALL SUCH FACTS, THE PRICING ARRANGEMENT BETWEEN THE PARTIES WAS MOR E THAN REASONABLE AS IT WAS THE LEGITIMATE NEED OF BUSINESS OF THE ASSESSEE WHICH I S ONE OF THE SITUATION COVERED IN SEC 40(A)(2)(A) ALSO. THEREFORE, ADDITION U/S 40(A)(2)( A) SHOULD NOT HAVE BEEN MADE. 3) THE APPELLANT APPLIED FOR PETTING THE ORDER FROM MI NISTRY OF DEFENCE MAINLY ON THE STRENGTH OF EXPERIENCE, RESOURCES, CAPABILITY AND C APACITY OF ITS SISTER CONCERN AS ON ITS OWN, IT WAS NOT IN A POSITION AT ALL TO EXECUTE THE ORDER . THE NON-EXECUTION OF ORDER WOULD HAVE RESULT IN BLA CK-LISTING OF APPELLANT FROM MINISTRY OF DEFENCE AND IMPOSITION OF MONETARY PENA LTY. BY GETTING THE ORDER EXECUTED FROM RELATED PARTY, THE APPELLANT STILL EARNED APPR OX. RS.19 LACS I.E. 5.50% OF GROSS MARGIN. KEEPING IN MIND THE QUANTUM AND NATURE OF ACTIVITY CARRIED OUT BY THE APPELLANT COMPANY, THIS MARGIN RETAINED BY THE APPELLANT WAS REASONABLE AND MARGIN PASSED TO RELATED PARTY WAS ALSO MORE THAN REASONABLE. THE PR ICING ARRANGEMENT WAS REASONABLE AND WAS NOT AT ALL EXCESSIVE HAVING REGARD TO BENEF IT DERIVED BY THE ASSESSEE FROM RELEVANT ORDER OF MINISTRY OF DEFENCE. LD. AO WAS H IGHLY UNJUSTIFIED IN MAKING IMPUGNED ADDITION OF RS. 82,89,576/- U/S 40 (A)(2)(A) OF THE ACT. 4) IN SUPPORT OF OUR FACTUAL ARGUMENTS, WE ALSO REL YING UPON RATIO OF FOLLOWING JUDGMENTS: [NO SUCH JUDGEMENTS ARE FOUND DETAILED BY THE AR IN THIS PARA] IN THE LIGHT OF ABOVE FACTS, CIRCUMSTANCES AND LEGA L POSITION OF THE CASE, IT IS PRAYED THAT THIS GROUND OF THE APPELLANT MAY PLEASE BE ALLOWED. WE SHALL BE HIGHLY OBLIGED.' 4.1 PER CONTRA THE LD. DR RELIED HEAVILY ON THE FINDINGS O F THE LD.CIT(A) AT PARA 13.2 OF THE ORDER AS UNDER: 13.2 HELD: I HAVE PERUSED THE ORDER OF THE ASSESSING OFFICER A ND EXAMINED THE REPLY OF THE ASSESSEE. IT IS AN UNDISPUTED FACT THAT THE APPELLA NT IS A COMPANY & IS ENGAGED IN MANUFACTURING OF SECURITY EQUIPMENTS. IT IS CLAIMED THAT THE APPELLANT PROCURES ORDER FOR SUPPLY OF ENGINEERING GOODS. THE MOOT QUESTION IN T HIS APPEAL IS LOW GP RATE AS COMPARED TO THE LAST YEAR AND PRICING ARRANGEMENT O F GOODS PURCHASED BY APPELLANT FROM M/S FUTURE TECHNOLOGIES (SISTER CONCERN). SH. R.K. GUPTA IS THE DIRECTOR OF APPELLANT COMPANY & HIS SON SH.AMIT GUPTA IS PROPRIETOR OF M/ S FUTURE TECHNOLOGIES. M/S FUTURE 6 TECHNOLOGIES IS A MANUFACTURING CONCERN WHOSE PROFI T IS DEDUCTIBLE U/S 80IC OF THE ACT SINCE ITS UNIT IS IN HIMACHAL PRADESH. BOTH ASSESSEE AND M/S FUTURE TECHNOLOGIES CLAIMED T O HAVE HISTORY & EXPERIENCE OF MANUFACTURING & SUPPLY OF SECURITY EQUIPMENTS TO MI NISTRY OF DEFENCE. THE ASSESSEE WHEN CONFRONTED SUBMITS THAT DURING THE YEAR COMPARATIVE PRICES OF RAW MATERIAL HAD INCREASED WHEREAS ON PERUSAL OF DETAILS OF PARTY WISE PURCHAS ES, THE AO HAS FOUND THAT THE ASSESSEE HAD OPENING BALANCE OF RAW MATERIAL AMOUNTING TO RS .99,10,455/-, WHICH WAS PURCHASED IN THE EARLIER YEARS AND USED THIS YEAR. IN RESPONS E OF THE ASSESSEE THAT THE COMPANY HAD MANUFACTURED DIFFERENT PRODUCTS EVERY YEAR AS PER T HE REQUIREMENTS OF THE CUSTOMERS IT IS OBSERVED THAT THE ASSESSEE HAS UTILIZED SAME RAW MA TERIAL DURING THE YEAR AS WELL AS IN THE PREVIOUS YEAR. HENCE, THE CLAIM OF THE ASSESSEE THA T THE PRODUCTS ARE TOTALLY DIFFERENT IN TWO YEARS IS OUTRIGHTLY INCORRECT. SINCE, ASSESSEE IS ITSELF MANUFACTURER OF SECURITY EQUIPMENTS, IT IS STRANGE THAT ASSESSEE IS REPORTIN G LOW GP AS COMPARED TO THE SISTER CONCERN M/S FUTURE TECHNOLOGY. THE ASSESSEE ITSELF STATED DURING ASSESSMENT PROCEEDINGS THAT THOUGH THE COMPANY HAD MANUFACTURED DIFFERENT ITEMS BUT CONSISTENTLY MAINTAINED ALMOST SAME G.P. TO CLAIM THAT ASSESSEE PURCHASED I TEMS FROM M/S FUTURE TECHNOLOGY ON CREDIT BASIS AND THIS WAS ONE OF THE REASONS FOR CH ARGING OF HIGHER RATE FROM RELATED PARTY M/S LOTUS MACHINES (P) LTD. IS NOT ACCEPTABLE WHEN AO HAS OBSERVED THAT THE ASSESSEE IN ROUTINE BUSINESS HAS PURCHASED ITEMS AT CREDIT FOR THREE MONTHS OR MORE THAN 3 MONTHS. THE ASSESSEE HAS FAILED TO PRODUCE THE TENDER DOCUMENTS AGAINST WHICH THE SUPPLY HAD BEEN MADE TO MINISTRY OF DEFENCE BEFORE THE AO AS WELL A S DURING APPELLATE PROCEEDINGS. THE ARGUMENT THAT REASONS FOR FALL IN G.P. WAS STIFF CO MPETITION IN THE MARKET FACED BY THE ASSESSEE IS ALSO NOT ACCEPTABLE AS THE ASSESSEE HAD MADE PURCHASES FROM THE RELATED PARTY AND THE RATE OF SALE TO THE DEFENCE MINISTRY WAS ALREADY DECIDED AS THE SUPPLY HAD BEEN MADE AGAINST THE TENDER AS CLAIMED BY THE ASSE SSEE. TO ARGUE THAT DURING THE YEAR IN QUESTION, THE APPELLANT COMPANY GOT SOME ORDER F ROM MINISTRY OF DEFENCE FOR SUPPLY OF CERTAIN SECURITY EQUIPMENTS AND M/S FUTURE TECHNOLO GIES HAD THE EXPERIENCE, MANUFACTURING FACILITIES, RESOURCES & CAPABILITY TO EXECUTE THE ORDER WITHIN SPECIFIED LIMITED TIME AND THE APPELLANT COMPANY COMPLETELY L ACKED IN ALL SUCH FACILITIES & RESOURCES, IS ALSO NOT ACCEPTABLE IN THE ABSENCE OF SUPPORTING EVIDENCE BROUGHT ON RECORD. TO FURTHER ARGUE THAT THE TOTAL GROSS MARGI N FROM ORDER OF MINISTRY OF DEFENCE WAS 30%, OUT OF WHICH 24% WAS EARNED BY M/S FUTURE TECH NOLOGIES & REST BY APPELLANT COMPANY IS ALSO NOT ACCEPTABLE AS IT IS OBSERVED TH AT THE APPELLANT COMPANY AS CLAIMED HAS ONLY ACTED AS A TRADER WHEREIN IT ONLY PROCURED THE ORDER & SUPPLIED THE GOODS TO CUSTOMER. THE APPELLANT HAS FAILED TO SUBMIT ANY AG REEMENT/MOU WITH SISTER CONCERN ON ARBITRARILY SHARING OF PROFITS OUT OF 30% GROSS MAR GIN. IT IS STRANGE THAT THE APPELLANT COMPANY IS LOUDLY ARGUING THAT IT HAS GOT ORDER FOR M MINISTRY OF DEFENCE FOR SUPPLY OF RELEVANT ITEMS, BUT DID NOT HAVE RELEVANT EXPERIENC E, RESOURCES & MANUFACTURING FACILITIES TO SUPPLY PRODUCT IN SHORT SPAN OF TIME OF LESS THA N 2 MONTHS. MEANING THEREBY THAT THE APPELLANT COMPANY IS PROCURING ORDERS FROM THE MINI STRY OF DEFENCE BY MISREPRESENTING THE TRUE FACTS WHEN IT HAS NO CAPABILITY IN THE FORM OF RELEVANT EXPERIENCE, RESOURCES & MANUFACTURING FACILITIES TO SUPPLY PRODUCT IN SHORT SPAN. THERE IS NO SUCH AGREEMENT OR MOU PRODUCED IN APPELLATE PROCEEDINGS WHICH WILL ESTABLISH THAT IT HAS PROCUR ED THE SAID ORDER BY SHOWING COLLABORATION WITH THE SISTER CONC ERN. NO TENDER DOCUMENT WAS EITHER EVER PRODUCED TO PROVE THE SAME. IF THE FMV OF THE GROUP IS IN FACT SO HIGH THEN WHY IS THE ASSESSEE SATISFIED IN SUCH LOW GP. IT IS IN THESE F ACTS AND CIRCUMSTANCES, THE LD. AO HAS HELD THAT BY ENTERING INTO THIS TRANSACTION WITH IT'S RE LATED PARTY AND BY INFLATING ITS PURCHASES, THE ASSESSEE HAS MADE AN ARRANGEMENT BY WAY OF WHIC H ITS GP RATE HAS COME DOWN BY 8.39% IN AY 2013-14 AS COMPARED TO THE EARLIER YEA R AND THE ASSESSEE HAS BEEN ABLE TO SHOW VERY HIGH RATE OF G.P IN RELATED PARTY M/S FUT URE TECHNOLOGY. HENCE, IT IS CLEAR THAT THE ASSESSEE HAD MADE PURCHASES FROM THE RELATED PA RTY AT UNREASONABLE PRICE AS THE ASSESSEE HAD MADE PURCHASES OF RS.3,38,35,000/- FRO M M/S FUTURE TECHNOLOGY WHICH IS A RELATED PARTY. BY THIS ARRANGEMENT, M/S FUTURE TECH NOLOGY HAD EARNED 40% G.P DURING THE ASSESSMENT YEAR 2013-14 AND ACCORDINGLY THE RELATED PARTY EARNED UNREASONABLE PROFIT FROM M/S LOTUS MACHINES PVT. LTD. OF RS. 96,67,142/ - @ 40% LEAVING PROFIT FOR THE ASSESSEE ABOUT @ 6% ONLY. IT IS A FACT THAT M/S FUTURE TECHN OLOGY IS THE UNIT CLAIMING DEDUCTION U/S 80IC OF THE ACT AND HIGH PROFIT SUITS THE SISTER CO NCERN. THERE SEEMS A TACIT ARRANGEMENT BETWEEN BOTH THE PARTIES. THE AO HAS RIGHTLY DISALL OWED THE SUM OF RS.82,89,576/- UNDER THE PROVISIONS OF SECTION 40A(2)(A) OF THE ACT. THE GROUND OF APPEAL NO.2 IS DISMISSED. 7 4.2 REFERRING TO THE SAME ,LD. DR CONTENDED THAT THE ASSE SSES EXPLANATION FOR FALL IN G.P WAS TOTALLY UNFOUNDED AND NOT SUPPORTED BY FACTS A S POINTED OUT BY THE LD.CIT(A) SO ALSO THE ASSESSES EXPLANATION JUSTIFYING THE REASONAB LENESS OF THE PURCHASES MADE FROM ITS SISTER CONCERN .THAT NO EVIDENCE OF PROCURING O RDER FROM THE GOVERNMENT BY THE ASSESSEE WAS FILED NOR REGARDING ARRANGEMENT FOR SHARI NG PROFITS EARNED FROM THE SAID ORDER. THAT THIS WAS JUST A TACIT ARRANGEMENT BY THE AS SESSEE OF SIPHONING OFF SUBSTANTIAL PROFITS EARNED FROM THE ORDER TO THE SISTER CONCERN WHOS E PROFITS WERE EXEMPT UNDER THE ACT . 5. WE HAVE HEARD BOTH THE PARTIES AND HAVE ALSO GONE THRO UGH THE ORDERS OF THE AUTHORITIES BELOW. THE MOOT QUESTION IS WHETHER THE PURCH ASES MADE BY THE ASSESSEE FROM ITS SISTER CONCERN OF RS.3,38,35,000/- DURING THE YEAR WERE AT FAIR MARKET PRICE/ARMS LENGTH. WE FIND CONSIDERABLE STRENGTH IN THE JUSTIFICATION GIVEN BY THE LD. COUNSEL FOR THE ASSESSEE FOR THE REASONABLENESS OF THE PRICE OF THE RE LATED PARTY TRANSACTION WHICH RESTS ON THE PREMISE THAT THE VALUE OF THE TRANSACTION IN T HE HANDS OF THE RELATED PARTY WAS AT CONSISTENTLY RETURNED GROSS PROFIT FROM YEAR TO YEAR WHICH STOOD ACCEPTED BY THE DEPARTMENT ALSO. ALL THE FACTUAL CONTENTIONS OF THE LD . COUNSEL FOR THE ASSESSEE WITH REGARD TO THE SAME HAVE REMAINED UNREBUTTED BEFORE US. IN VIEW OF THE SAME THE SALE PRICE OF THE IMPUGNED TRANSACTION IN THE HANDS OF THE RELA TED PARTY IS UNDOUBTEDLY ESTABLISHED TO BE AT FAIR MARKET VALUE AND CONSEQUENT LY SO THE PURCHASES IN THE HANDS OF THE ASSESSEE. THE ASSESSEE WE FIND HAS SUFFICIENTLY ESTABLISHED THE REASONABLENESS OF THE PURCHASES MADE FROM SISTER CONCERN. ON THE OTHER HAND THE REASONING OF THE LD.CIT(A) HOLDING THE PURCHASES TO BE INFLATED , WE F IND,IS BASED ON SURROUNDING CIRCUMSTANCES AND THERE IS NO DIRECT EVIDENCE ESTABLIS HING THE UNREASONABLENESS OF THE PURCHASES . THE ENTIRE CASE OF THE REVENUE IS THAT THE ASS ESSEE WAS UNABLE TO JUSTIFY FALL IN GROSS PROFITS DURING THE YEAR AND THAT ITS EXPLANATION OF HAVING PROCURED AN ORDER FROM THE GOVERNMENT WHICH IT OUTSOURCED TO ITS RELATED PARTY FOR MANUFACTURING THE PRODUCT ,THE ASSESSEE ITSELF ACTING AS A TRADER ALONE , RESULTING IN LARGER SHARE OF THE PROFIT IN THE TRANSACTION BEING GIVEN TO THE RELATED PARTY AND THE ASSESSEE RETAINING ONLY A SMALL PORTION, WAS ALL UNSUBSTANTIATED AND MAKE BELIEV E .THAT THE ASSESSEE HAD SO MANAGED AND ARRANGED ITS AFFAIRS THAT IT SIPHONED OFF LAR GER SHARE OF THE PROFITS TO ITS RELATED CONCERN WHICH WAS A TAX EXEMPT UNIT RETAINING ONL Y A SMALL PORTION OF THE 8 PROFITS. TO PUT IT SUCCINCTLY ,FAILURE TO EXPLAIN SA TISFACTORILY FALL IN G.P IS THE MAIN PLANK FOR HOLDING THE TRANSACTION OF PURCHASE OF THE ASSESSEE WITH THE RELATED PARTY AS BEING INFLATED AND NOT AT FAIR VALUE. THE DEPARTMENT ITSELF HA VING ACCEPTED THE PRICE/VALUE OF THE IMPUGNED TRANSACTION IN THE HANDS OF THE RELATED PARTY I N SCRUTINY ASSESSMENT AND NOTHING HAVING BEEN BROUGHT BEFORE US DEMONSTRATING ANY CORR ECTIVE ACTION BEING INITIATED BY THE DEPARTMENT AGAINST IT IN VIEW OF THE IMP UGNED TRANSACTION BEING FOUND TO BE AT INFLATED PRICES,WE FIND NO FORCE IN THE ARGUME NT OF THE REVENUE. 6. IN VIEW OF THE ABOVE, WE HOLD THAT THE TRANSACTION OF P URCHASES MADE BY THE ASSESSEE WITH ITS RELATED PARTY STANDS ESTABLISHED TO BE AT FAIR MARKET VALUE AND THE ADDITION MADE OF RS. 82,89,576/- U/S 40A(2)(B) OF T HE ACT ,IS THEREFORE DELETED. 7. GROUND OF APPEAL RAISED BY THE ASSESSEE IS ALLOWED . 8. IN EFFECT APPEAL OF THE ASSESSEE IS ALLOWED. ORDER PRONOUNCED ON 22/01/2021. SD/- SD/- ' # $ %! (SANJAY GARG) (ANNAPURNA GUPTA) /JUDICIAL MEMBER &' /ACCOUNTANT MEMBER )' /DATED: 22/01/2021 AG &) *+ ,+ / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDENT 3. ' - / CIT 4. ' - ( )/ THE CIT(A) 5. +./ 0 , $ 0 , 123/4 / DR, ITAT, CHANDIGARH 6. /3 5# / GUARD FILE