LIVINGSTONES, MUMBAI V. ASST CIT (3), MUMBAI

ITA 5884/MUM/2012

• Counselvise Citation: 588419914 RSA 2012
• Duration Of Justice: 1 year(s) 4 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 04-02-2014
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: K
• Next Hearing Date: 04-02-2014
• Assessment Year: 2008-2009
• Appeal Filed On: 27-09-2012
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: B P K
• Assessee Lawyers: VIJAY MEHTA
• Keywords: Transfer pricing; Business expenditure; Notional interest
• Section: 92C; 14A; 10B

Judgement Text

, IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES K MUMBAI . . , / !' , # $ % BEFORE SHRI I.P. BANSAL, JUDICIAL MEMBER /AND SHRI N.K.BILLAIYA, ACCOUNTANT MEMBER . / ITA NO. 5884/MUM/2012 ' ' ' ' / ASSESSMENT YEAR 2008-09 M/S.LIVING STONES, 201, DHARAM PALACE BLDG., N.S.PATKAR MARG, GAMDEVI, MUMBAI- 400 007. / VS. THE ACIT 16(3), MATRU MANDIR, 2 ND FLOOR, GRANT ROAD, MUMBAI - 400 007 ( # ./ )* ./ PAN/GIR NO. : AAAFL 0356L ( (+ / APPELLANT ) .. ( ,-(+ / RESPONDENT ) . / ITA NO. 5930/MUM/2012 ' ' ' ' / ASSESSMENT YEAR 2008-09 THE ACIT 16(3), MATRU MANDIR, 2 ND FLOOR, GRANT ROAD, MUMBAI - 400 007 / VS. M/S.LIVING STONES, 201, DHARAM PALACE BLDG., N.S.PATKAR MARG, GAMDEVI, MUMBAI 400 007. ( # ./ )* ./ PAN/GIR NO. : AAAFL 0356L ( (+ / APPELLANT ) .. ( ,-(+ / RESPONDENT ) ASSESSEE BY : SHRI VIJAY MEHTA RESPONDENT BY : SHRI B.P.K.PANDA . /# / DATE OF HEARING : 04/02/2014 01' . /# / DATE OF PRONOUNCEMENT : 04/02/2014 . / ITA NO. 5884&5930/MUM/2012 ' ' ' ' / ASSESSMENT YEAR 2008-09 2 2 / O R D E R PER BENCH: THESE CROSS APPEALS ARE DIRECTED AGAINST ORDER DATED 13/07/2012 PASSED BY LD. CIT(A)-15, MUMBAI FOR ASSESSMENT YE AR 2008-09. 2. AT THE TIME OF HEARING LD. A.R HAD FURNISHED C ONCISE GROUNDS OF APPEAL AS THE GROUNDS OF APPEAL ORIGINALLY FILED WERE LENGTHY AN D NARRATIVE. THE CONCISE GROUNDS READ AS UNDER: 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE LEARNED CIT(A) ERRED IN UPHOLDING ADDITION OF RS.1,99,356/- ON ACCOUNT OF TRANSFER PRICING ADJUSTMENT MADE BY TRANSFER PRICING OFFICER/ASSESSI NG OFFICER (TPO/AO) BY APPLYING CUP METHOD INSTEAD OF TNMM FOLLOWED BY THE APPELLANT IN ITS TRANSFER PRICING STUDY REPORT. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE LEARNED CIT(A) HAS ERRED IN CONFIRMING ADDITION ON ACCOUNT OF TRANSFER PRICING ADJUSTMENT OF RS. 1,99,356/- WITHOUT GRANTING THE BENEFIT OF V OLUME, RISK ADJUSTMENTS AND OTHER QUALITATIVE FACTORS. 3. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE LEARNED CIT(A) ERRED IN GRANTING ONLY A PARTIAL RELIEF OF R S. 22,01,826/- AND PARTIALLY UPHOLDING THE ADJUSTMENT OF RS. 877,651/- MADE BY T PO/AO ON ACCOUNT OF NOTIONAL INTEREST INCOME ON ALLEGED DELAY IN COLLEC TION OF INVOICES. 4. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE LEARNED CIT(A) ERRED IN UPHOLDING THE DISALLOWANCE MADE BY THE ASSESSING OFFICER OF AN AMOUNT OF RS. 11,24,917/- UNDER THE PROVISIONS OF S ECTION 14A. GROUNDS OF REVENUES APPEAL: 1. WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A) ERRED IN NOT CONSIDERING THE FACT THAT THE ASSESSEE WAS ALLOWING ITS AE TO MAKE THE DELAYED REALIZATION OF DEBTS IN SPITE OF UTILIZ ING HUGE BORROWED FUNDS FOR ITS BUSINESS OPERATIONS. 2. WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CA SE AND IN LAW, THE [LD. CIT(A) ERRED IN NOT CONSIDERING THE FACT THAT CHARGING THE ARMS LENGTH INTEREST AT 6 MONTHS LIBOR +150 BASIS POINTS WILL BE INCONGRUOUS , AS THE ASSESSEE ITSELF HAS AVAILED BORROWED FUNDS WITH HUGE RATE OF INTEREST. 3. IT MAY BE MENTIONED HERE THAT GROUND NO.3 OF ASS ESSEES APPEAL AND GROUNDS RAISED BY THE REVENUE RELATES TO ONE ISSUE I.E. REG ARDING TRANSFER PRICING ADDITION OF . / ITA NO. 5884&5930/MUM/2012 ' ' ' ' / ASSESSMENT YEAR 2008-09 3 RS.30,79,447/- OUT OF WHICH ADDITION OF RS.22,01,82 6/- IS DELETED AND ADDITION OF RS.8,77,651/- IS UPHELD. 4. APROPOS GROUND NO.1 OF ASSESSEES APPEAL, IT WAS SUBMITTED BY LD. AR THAT THIS ISSUE IS COVERED AGAINST THE ASSESSEE BY THE ORDER OF THE TRIBUNAL DATED 23/10/2013 IN ITA NO.7303/MUM/2011 ( ASSESSEES APPEAL) AND IT A NO.7460/MUM/2011 ( REVENUES APPEAL) REFERENCE WAS MADE TO THE FOLLOWI NG OBSERVATIONS: 7.1 THE APPLICATION OF ARMS LENGTH PRICE IS BASED ON COMPARISON OF THE CONDITIONS IN CONTROLLED TRANSACTION WITH THE CONDITIONS IN TRANS ACTION BETWEEN INDEPENDENT ENTERPRISE I.E. UNCONTROLLED TRANSACTION, SO AS TO DETERMINE THE MARKET PRICE OR THE MARGIN ON WHICH THE TWO RELATED PARTIES ARE CARRYIN G ON THEIR TRANSACTION. THE DETERMINATION OF ARMS LENGTH PRICE HAS TO BE DONE AS PER THE METHODOLOGY PRESCRIBED U/S 92C READ WITH RULE 10B. ALL THESE ME THODS ARE EITHER BASED ON PRICE OR ON PROFIT WHICH DETERMINE THE TRANSFER PRICE BY EXAMINING COMPARABLE MATCHING TRANSACTION, COMPARABLE ADJUSTABLE TRANSACTION AND COMPARABLE PROFIT TRANSACTION. THE RULE 1OB(1)(A) PROVIDES THAT COMPARABLE UNCONTR OLLED PRICE METHOD I.E. CUP, IS COMPARISON OF THE PRICES OF THE PROPERTY OR SERVICE S TRANSFERRED IN A CONTROL TRANSACTION TO THE PRICE CHARGED IN THE PROPERTY OR SERVICES TRANSFERRED IN A COMPARABLE UNCONTROLLED TRANSACTION. THE MAIN CRITE RIA IS THAT, THE MARKET PRICE SHOULD BE COMPARABLE TO THE SAME OR SIMILAR NATURE OF GOODS WHICH HAS BEEN CHARGED UNDER SIMILAR CONDITIONS. THUS, NOT ONLY TH ERE SHOULD BE HUGE SIMILARITY IN THE PRODUCTS BUT ALSO IN THE BUSINESS FUNCTIONS. LO OKING TO ITS SENSITIVITY ON THE PROPERTIES OF THE PRODUCT AND ACCOMPANYING CIRCUMST ANCES AND CONDITIONS, THE APPLICATION OF CUP METHOD BECOMES VERY DIFFICULT. E VEN A MINOR CHANGES IN THE PROPERTIES OF THE PRODUCTS, RENDERS THE APPLICABILI TY OF CUP METHOD INAPPLICABLE. THE PRODUCT COMPARABILITY IS AN ABSOLUTE KEY IN CUP, BE CAUSE PHYSICAL FEATURES SUCH AS SIZE, WEIGHT, APPEARANCE, VOLUME AND RELIABILITY OF THE PRODUCT ETC, HAS TO BE EXAMINED. IF SIMILARITY OF PRODUCT AND CONDITIONS I N COMPARABLE CONTROLLED TRANSACTIONS AND UNCONTROLLED TRANSACTIONS ARE THE SAME, THEN THE CUP METHOD CAN BE APPLIED WITH CERTAIN ADJUSTMENTS. THERE CAN BE A N INTERNAL CUP, WHEN ONE OF THE GROUP ENTITIES ENTERS INTO A COMPARABLE TRANSACTION WITH AN UNRELATED PARTY WHERE THE GOODS OR SERVICES UNDER CONSIDERATION ARE SAME OR SIMILAR. THERE CAN BE EXTERNAL CUP ALSO, IF A TRANSACTION BETWEEN TWO IND EPENDENT ENTERPRISES INVOLVES GOODS OR SERVICES UNDER COMPARABLE CONDITIONS. AS P OINTED OUT BY THE LD. COUNSEL, IN DIAMOND INDUSTRY/BUSINESS WITHIN THE SAME PRODUC T OF DIAMOND, THERE IS A HUGE DISSIMILARITY AND VARIATION OF FEATURES WHICH LEADS TO DIFFERENCE IN THE PRICES. THE PRICING OF THE DIAMONDS DEPENDS UPON VARIOUS PARAME TERS/FACTORS LIKE SIZE OF THE DIAMOND , CARAT WEIGHT, VARIOUS TYPES OF SHAPE, COL OUR FLORESCENCE, CLARITY GRADE, POLISHING, HEIGHT AND DEPTH ANGLE, GIRDLE THICKNESS ETC., WHICH LEADS TO DIFFERENTIAL PRICING OF THE DIAMONDS. IN SUCH A CONDITION IT BEC OMES VERY DIFFICULT TO APPLY CUP METHOD IN BENCH MARKING THE PRICING OF THE DIAMOND. ON THIS PROPOSITION WE FULLY AGREE WITH THE CONTENTION OF THE LD. COUNSEL THAT C UP METHOD IS GENERALLY NOT A VERY SUITABLE METHOD FOR BENCH MARKING THE PRICING OF THE DIAMONDS AND PRICE PAID IN COMPARABLE UNCONTROLLED PURCHASE OR SALES. IT IS NOT A VERY EASY PROPOSITION TO HOLD THAT CUP WOULD BE AN APPROPRIATE METHOD FOR BE NCHMARKING THE PRICES IN THE . / ITA NO. 5884&5930/MUM/2012 ' ' ' ' / ASSESSMENT YEAR 2008-09 4 TRANSACTION OF THE DIAMONDS, OWNING TO VARIOUS DIFF ERENCES BETWEEN THE PRODUCTS ITSELF AS HIGHLIGHTED ABOVE. 5. IT WAS SUBMITTED THAT FACTS AND CIRCUMSTANCES O F THE PRESENT CASE ARE SIMILAR TO THE FACTS AND CIRCUMSTANCES MENTIONED I N RESPECT OF A.Y.2007-08. TO SUCH CONTENTION OF LD. AR, LD. DR DID NOT HAVE ANY OBJECTION. THEREFORE, RESPECTFULLY FOLLOWING THE AFOREMENTIONED ORDER OF THE TRIBUNAL WE HOLD THAT WITH REGARD TO TRANSFER PRICING ADJUSTMENT OF RS.1, 99,356/- THE APPROPRIATE METHOD TO BE ADOPTED WAS CUP IN PLACE OF TNMM APPLI ED BY THE ASSESSEE. THEREFORE, GROUND NO.1 IS DECIDED AGAINST THE ASSES SEE AND IS DISMISSED. 6. APROPOS GROUND NO.2, IT WAS SUBMITTED THAT THIS ISSUE ALSO WAS CONSIDERED BY THE TRIBUNAL IN THE AFOREMENTIONED O RDER AND AFTER ANALYZING THE FACTS OF THE CASE TRIBUNAL VIDE PARA-8 OF THE A FOREMENTIONED ORDER HAS COME TO A CONCLUSION THAT ON ACCOUNT OF VARIOUS FACTORS WHICH INTER-ALIA INCLUDE AN ELEMENT OF BAD DEBT RISK INVOLVED IN THE CASE OF TH REE PARTIES, WHICH IS MUCH LESS PROBABLE IN THE CASE OF RELATED PARTIES, THE A SSESSEE WAS ENTITLED TO GET DISCOUNT OF APPROXIMATELY 11%. THE RELEVANT OBSERV ATIONS OF THE TRIBUNAL FROM SAID ORDER READ AS UNDER: 8.NOW COMING TO THE ADJUSTMENT OF RS. 51,32,512/-O N WHICH ASSESSEE IS IN APPEAL, WHICH IS ON ACCOUNT OF TRANSACTIONS WITH ONE OF THE THIRD PARTY GIVEN AT SERIAL NO.4 OF THE TABLE, ASSESSEES CASE BEFORE THE TPO AS WELL A S BEFORE THE CIT(A) WAS THAT, THE ASSESSEES SALES WITH ITS AE AGGREGATED TO RS. 126. 43 CRORES, WHEREAS IN CASE OF THE NON AE IT WAS ONLY 70 LAKHS, THUS THERE WAS A H UGE DIFFERENCE OF VOLUME WHICH SHOULD BE TAKEN INTO CONSIDERATION WHILE EXAMINING THE PRICE DIFFERENCES AND ACCORDINGLY THE ADJUSTMENT SHOULD BE MADE. BESIDES THIS, IT WAS ALSO SUBMITTED THAT PRICE DIFFERENCES IN DIAMOND BUSINESS ARE ALSO ON ACCOUNT OF PRICE FLUCTUATION AND DIFFERENTIAL TIME PERIOD. FURTHER, IN CASE OF T HIRD PARTY THERE IS ALWAYS A RISK OF BAD DEBT WHICH IS NOT THERE IN THE CASE OF THE AE A ND ALSO THE MARKETING EXPENSES IN THE CASE OF THE AE IS LESS. IF THESE DIFFERENCES ARE TAKEN INTO CONSIDERATION AND ACCORDINGLY ADJUSTMENT IS MADE, THEN THERE IS NO RE QUIREMENT FOR MAKING ANY UPWARD ADJUSTMENT OF THE ARMS LENGTH PRICE. THE LD CIT(A) HAS REJECTED THIS CONTENTION, MAINLY ON THE GROUND THAT THE ASSESSEE COULD NOT BROUGHT ANYTHING ON THE RECORD THAT AES WERE ELIGIBLE FOR DISCOUNT, BAS ED ON QUANTITY SOLD AND THESE DIFFERENCES ARE NOT MATERIAL DIFFERENCE. WE ARE OF THE OPINION THAT SUCH A REASONING GIVEN BY THE LD. CIT(A) CANNOT BE UPHELD, BECAUSE T HESE FACTORS DO HAVE AFFECT IN THE NEGOTIATION OF PRICE. THE DIFFERENCE ON ACCOUNT OF FACTORS AFFECTING THE PRICES HAVE TO BE GIVEN ADJUSTMENT WITH THE COMPARABLES. S INCE, IN A CUP METHOD A VERY . / ITA NO. 5884&5930/MUM/2012 ' ' ' ' / ASSESSMENT YEAR 2008-09 5 HIGH DEGREE OF COMPARISON OF BUSINESS CONDITIONS, P RODUCTS AND OTHER PHYSICAL ATTRIBUTES OF THE PRODUCTS AND SERVICES ARE TO BE E XAMINED, THEREFORE, MORE OFTEN IT BECOMES VERY DIFFICULT TO HAVE SUCH COMPARABLE TRAN SACTIONS. THE RULE 10B. PROVIDES THAT IN SUCH A SITUATION, ADJUSTMENT ON ACCOUNT OF DIFFERENCES CAN BE MADE IF IT MATERIALLY AFFECTS THE PRICE IN THE OPEN MARKET. TH E NEGOTIATION OF A PRICE DEPENDS UPON VARIOUS FACTORS LIKE VOLUME OF SALES/TRANSACTI ON, CONTRACTUAL TERMS OF THE PARTIES, GEOGRAPHICAL MARKET CONDITIONS IN WHICH TR ANSACTION TAKES PLACE, TIME AND PERIOD OF TRANSACTION AND VARIOUS OTHER RISK FACTOR S LIKE BAD DEBT RISK, FOREIGN CURRENCY RISK ETC. ALL THESE FACTORS HAVE TO BE TAK EN INTO ACCOUNT FOR THE DETERMINATION OF A PRICE IN A GIVEN TRANSACTION. IN THIS PARTICULAR TRANSACTION, THE ASSESSEE HAS SOLD THE TOTAL QUANTITY OF 2773.20 TO ITS AE WITH AN AVERAGE RATE OF 328.89 DOLLARS, WHEREAS TO THE THIRD PARTY, THE ASS ESSEE HAS MERELY SOLD QUANTITY OF 8.50 WITH THE RATE OF 370 DOLLARS. THUS THERE IS A HUGE DIFFERENCE IN VOLUME OF SALE AND IT IS QUITE A NORMAL PHENOMENA THAT IF THE PURCHASES AND SALES ARE MADE IN HUGE QUANTITY THEN THERE IS ALWAYS A CHANCE OF N EGOTIATION OF PREFERABLE PRICE BY THE PURCHASER AND THERE IS DIFFERENCE IN THE PRICE AS COMPARED TO THE ONE WHERE VERY SMALL QUANTITY OF SALE OR PURCHASE TAKES PLACE . SUCH DIFFERENCE OF VOLUME, DEFINITELY HAS A BEARING ON THE NEGOTIATION OF THE PRICES AND, THEREFORE, ADJUSTMENT ON THIS FACTOR HAS TO BE MADE. THIS ITSELF IS A MAT ERIAL DIFFERENCE. WE, ALSO AGREE WITH THE CONTENTION OF THE ASSESSEE THAT MARKETING EXPENSES IN THE CASE OF THE AE ARE COMPARATIVELY LESS AS THERE IS QUITE PROBABILIT Y OF TRANSACTION BEING FINALIZED. THERE IS ALSO AN ELEMENT OF BAD DEBT RISK INVOLVED IN THE CASE OF THIRD PARTY WHICH IS MUCH LESS PROBABLE IN THE CASE OF THE RELA TED PARTY. IF ALL THESE DIFFERENCES, WHICH IN OUR OPINION ARE QUITE MATERI AL DIFFERENCES ARE TAKEN INTO ACCOUNT AND ADJUSTMENT IS MADE THEN DIFFERENCE OF RATE, WHICH HERE IN THIS CASE IS APPROXIMATELY 11%, CAN BE MADE. THUS, LOOKING TO THESE FACTORS OF MATERIAL DIFFERENCE INCLUDING HUGE DIFFERENCE IN VO LUME, ADJUSTMENT OF DIFFERENTIAL RATE OF 41.11 IN TERMS OF DOLLAR IN THE TRANSACTION OF SALE PRICE BETWEEN AE AND THIRD PARTY CAN BE MADE UNDER THE CUP, WHICH IS ALSO PERM ISSIBLE UNDER RULE 10B ACCORDINGLY, WE HOLD THAT SUCH A PRICE DIFFERENCE I N THE AFORESAID TRANSACTION HAS TO BE IGNORED AND ADJUSTMENT HAS TO BE MADE FOR COMPAR ING THE NEGOTIATED PRICE CHARGED FROM THE AE AS WELL AS FROM THE THIRD PARTY AND IF SUCH AN ADJUSTMENT IS CARRIED OUT THEN THERE IS NO REQUIREMENT FOR MAKING ANY KIND OF UPWARD ADJUSTMENT IN THIS CASE. THEREFORE, THE DECISION OF CIT(A) IN CONFIRMING THE ADJUSTMENT OF RS. 51,32,512/ TO THE ARMS LENGTH PRICE IS REVERSED AN D THE SAID ADDITION IS DELETED.. ACCORDINGLY, THE GROUND RAISED BY THE ASSESSEE IS T REATED AS ALLOWED, WHEREAS GROUND NO.1,2 AND 3 AS RAISED BY THE REVENUE STANDS DISMISSED. 6.1 REFERRING TO THE AFOREMENTIONED OBSERVATIONS OF THE TRIBUNAL IN RESPECT OF IMMEDIATE PRECEDING YEAR, IT WAS SUBMITTED BY LD. A R THAT AS THERE IS NO DIFFERENCE IN THE FACTS AND CIRCUMSTANCES OF THE CASE, APPROPR IATE RELIEF SHOULD BE GIVEN TO THE ASSESSEE. LD. AR SUBMITTED THAT AS THE DIFFERENCE IN ARMS LENGTH PRICE ITSELF IS LESS THAN 11%, THEREFORE, NO FURTHER ADJUSTMENT WILL BE REQUIRED TO BE MADE. FOR COMPLETENESS OF FACTS LD. AR REFERRED TO THE FOLLOW ING TWO TABLES FROM THE ORDER TPO WHICH READ AS UNDER: . / ITA NO. 5884&5930/MUM/2012 ' ' ' ' / ASSESSMENT YEAR 2008-09 6 AFTER CONSIDERING THE OBJECTIONS RAISED BY THE TA XPAYER, THE ARMS LENGTH PRICE CHARGED BY THE TAXPAYER , THE ARMS LENGTH PRICE OF DIAMOND S OF VARIETY 6D CUT WHITE VVS 1 IS DETERMINED AS UNDER USING THE PRICE CHARGED BY THE TAXPAYER IN ITS NON-AE TRANSACTIONS UNDER CUP METHOD. SL.NO. DATE OF INVOICE NO. OF CARATS RATE PER CARAT CHARGED (USD) CUP RATE PER CARAT (USD) ADJUSTMENT FOR MARKETING @ 0.17% (USD) ADJUSTED CUP RATE PER CARAT (USD) 1 28/11/2007 31.60 850.00 911.00 1.55 909.45 2 02/01/2008 14.43 850.00 911.00 1.55 909.45 3 31/03/2008 18.11 850.00 911.00 1.55 909.45 4 31/03/2008 10.56 800.00 911.00 1.55 909.45 ARMS LENGTH PRICE: S.NO. DATE OF INVOICE NO. CARATS RATE PER CARAT CHARGED (USD) ADJUSTED CUP RATE PER CARAT (USD) DIFFERENCE (USD) ADJUSTMENT (USD) 1 28/11/2007 31.60 850.00 909.45 59.45 18 79 2 02/01/2008 14.43 850.00 909.45 59.45 858 3 31/03/2008 18.11 850.00 909.45 59.45 10 77 4 31/03/2008 10.56 800.00 909.45 109.45 11 56 TOTAL 4969 6.2 REFERRING TO THE ABOVE TABLE IT WAS DESCRIBED B Y LD. AR THAT WITH REGARD TO THREE TRANSACTIONS MENTIONED AT SL.NO. 1 TO 3 THE D IFFERENCE WILL BE 6.7%, WHEREAS WITH REGARD TO 4 TH TRANSACTION THE DIFFERENCE WILL BE 12.18%. IT WAS SUBMITTED BY HIM THAT IF THE TRANSACTIONS ARE TAKEN INDIVIDUALLY THEN THERE CANNOT BE ANY ADDITION WITH REGARD TO TRANSACTION MENTIONED AT SL. NO. 1 TO 3. SO FAR AS IT RELATES TO ADDITION WITH REGARD TO 4 TH TRANSACTION LD. AR SUBMITTED THAT THE SAME WILL FA LL WITHIN THE SAFE HARBOUR OF (+) 5% . 6.3. ON THE OTHER HAND LD. DR RELIED UPON THE ORDE R PASSED BY A.O AND LD. CIT(A). 6.4 WE HAVE HEARD BOTH THE PARTIES AND THEIR CONTEN TIONS HAVE CAREFULLY BEEN CONSIDERED. RESPECTFULLY FOLLOWING THE AFOREMENTIO NED ORDER OF THE TRIBUNAL WE HOLD THAT ASSESSEE IS ENTITLED TO GET 11% DISCOUNT FOR T HE REASONS GIVEN IN THE EARLIER ORDER OF THE TRIBUNAL. IF THE SAME IS TAKEN INTO CONSIDE RATION, ACCORDING TO THE FACTS MENTIONED ABOVE, NO ADDITION ON THIS ISSUE WILL SUR VIVE. THE IMPUGNED ADDITION IS DELETED. THEREFORE, WE ALLOW GROUND NO.2 OF THE A SSESSEES APPEAL. . / ITA NO. 5884&5930/MUM/2012 ' ' ' ' / ASSESSMENT YEAR 2008-09 7 7. APROPOS GROUND NO.3, THIS ADDITION HAS BEEN DISC USSED BY TPO IN PARA - 6 OF HIS ORDER. THE ADDITION IS MADE ON THE GROUND THA T THE AVERAGE REALIZATION PERIOD FROM THE AE EXCEEDS SIMILAR PERIOD IN RESPECT OF NO N-AE TRANSACTION. ACCORDING TO TPO AVERAGE PERIOD OF REALIZATION FROM AE WAS 196 DAYS AGAINST SIMILAR PERIOD FOR NON-AES OF 126 DAYS. THE DIFFERENCE WAS CALCULATED OF A DELAY OF 70 DAYS AND ACCORDINGLY ADDITION WAS COMPUTED AT RS.30,79,477/- IN THE FOLLOWING MANNER: DELAY IN DAYS 9 DAYS TOTAL VALUE OF REALIZATION FROM THE AE RS. 780,561,971/- RATE OF INTEREST 16% INTEREST: 780,561X9X16 = RS.30,79,477/- 365X 100 6.10 IN VIEW OF THE ABOVE, AN ADJUSTMENT OF RS.30,7 9,477/- IS MADE ON ACCOUNT OF DELAYED REALIZATION FROM THE AES. 7.1 THE ADDITION WAS AGITATED IN AN APPEAL FILED BE FORE LD. CIT(A) AND THIS ISSUE IS DEALT WITH BY LD. CIT(A) IN PARA-4 OF HIS ORDER AND AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE HE DIRECTED THE AO TO WORK OUT THE QUANTUM OF ADJUSTMENT BY ADOPTING RATE OF INTEREST AS SIX MON THS LIBOR + 150 BASIS POINT FOR SUCH DELAYED RECEIPT OF PAYMENT FROM AE. ACCOR DINGLY, THE ADDITION OF RS.22,01,826/- WAS DELETED AND SUSTAINED TO THE EXT ENT OF RS.8,77,651/-. IN GROUND NO.3, THE ASSESSEE IS AGITATING THE SUSTAINE D ADDITION OF RS.8,77,651/- AND REVENUE IN ITS APPEAL IS AGITATING THE DELETION OF RS.22,01,826/-. 7.2 AT THE OUTSET IT WAS SUBMITTED BY LD. AR THAT T HIS ISSUE WAS ALSO THE SUBJECT OF CONSIDERATION BEFORE THE TRIBUNAL IN RE SPECT OF A.Y.2007-08 AND ADJUSTMENT ON THIS ACCOUNT WAS DELETED WITH THE FO LLOWING OBSERVATIONS: 12. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSI ONS AND ALSO PERUSED THE RELEVANT FINDING OF THE TPO AS WELL AS THE CIT(A) A ND ALSO THE MATERIAL ON RECORD. IT IS AN UNDISPUTED FACT THAT THE ASSESSEE HAS NOT CHA RGED ANY INTEREST FROM THE THIRD PARTY IN RESPECT OF DELAYED PAYMENTS EVEN WHEN THE TIME PERIOD OF REALIZATION HAS EXCEEDED MORE THAN 300 TO 400 DAYS. FROM THE PERUSA L OF THE DETAILS AS SUBMITTED BY THE LEARNED COUNSEL IN THE PAPER BOOK, IT IS SEE N THAT THERE ARE MANY INSTANCES IN . / ITA NO. 5884&5930/MUM/2012 ' ' ' ' / ASSESSMENT YEAR 2008-09 8 WHICH MORE THAN 200 .DAYS HAVE BEEN EXCEEDED IN REA LIZATION OF PAYMENTS IN CASE OF THIRD PARTIES. ONCE ON SUCH DELAYED PAYMENTS WIT H THIRD PARTY NO INTEREST HAS BEEN CHARGED, THEN TO WORK OUT THE NOTIONAL INTERES T IN CASE OF DELAYED PAYMENT BY THE AE IS ALSO NOT CALLED FOR. THE COMPARISON IN S UCH A CASE HAS TO BE MADE WITH CONTROLLED AND UNCONTROLLED TRANSACTIONS AND ONCE T HERE IS NO SUCH FACTOR PRESENT IN THE UNCONTROLLED TRANSACTION THEN THE SAME CANNOT B E TAKEN AS A BENCH MARK FOR THE CONTROLLED TRANSACTION. MOREOVER, WE AGREE WITH THE CONTENTION OF LEARNED COUNSEL THAT IN THE CASE OF AE THE VOLUME OF SALE IS VERY H UGE AS COMPARED TO VOLUME OF SALE IN CASE OF THIRD PARTY AND SUCH DELAY IN REALIZATIO N OF PAYMENT SHOULD NOT BE ADVERSELY VIEWED ON THE BASIS OF AVERAGE WORKING OF DAYS. THE AVERAGE DAYS OF DELAY IN PAYMENT AS WORKED OUT BY THE TPO IS ALSO I NAPPROPRIATE AS NUMBER OF SALE TRANSACTIONS WITH AE IS FAR MORE THAN THE NON AE AN D WILL RESULT IN IMPROPER WORKING OF AVERAGE DAYS. ON THESE FACTS OF THE CASE , WE DO NOT FIND ANY REASON FOR MAKING ANY KIND OF UPWARD ADJUSTMENT ON ACCOUNT OF DIFFERENCES IN PERIOD FOR REALIZATION OF PAYMENTS IN RESPECT OF SALES MADE TO AE AS WELL AS NON AES. SUCH A NOTIONAL INTEREST CANNOT BE CHARGED FOR THE PURPOSE OF MAKING ADJUSTMENT IN ARMS LENGTH PRICE. THUS THE ORDER OF CIT(A) DELETING THE ADJUSTMENT OF RS, 4,65,23,007/- ON THIS SCORE IS UPHELD AND THE GROUND RAISED BY TH E DEPARTMENT STANDS DISMISSED. 7.3 IT WAS SUBMITTED THAT FACTS AND CIRCUMSTANCES O F THE CASE ARE SIMILAR AS THE ASSESSEE DID NOT CHARGE ANY INTEREST ON NON-AE TRANSACTIONS AND IN SOME CASES THE REALIZATION PERIOD OF NON-AE TRANSACTIONS WAS MORE THAN THE SIMILAR REALIZATION PERIOD OF AE TRANSACTIONS. HE SUBMITTE D THAT THIS FACT HAS BEEN TAKEN NOTE BY THE TRIBUNAL AND IT WAS HELD THAT NO ADDITION WAS CALLED FOR. 7.4 ON THE OTHER HAND, LD. DR RELIED UPON THE ORDER PASSED BY TPO. HE SUBMITTED THAT ADDITION WAS RIGHTLY MADE AND IT HAS WRONGLY BEEN DELETED PARTLY BY LD. CIT(A). 7.5 WE HAVE HEARD BOTH THE PARTIES AND THEIR CONTEN TIONS HAVE CAREFULLY BEEN CONSIDERED. AS NO DIFFERENCE IN FACTS AND CIRCU MSTANCES OF THE CASE ARE POINTED OUT, RESPECTFULLY FOLLOWING THE AFOREMENTIO NED ORDER OF THE TRIBUNAL, WE DELETE THE ADDITION IN ITS ENTIRETY. GROUND NO.3 O F ASSESSEES APPEAL IS ALLOWED AND GROUNDS OF APPEAL RAISED BY THE REVENUE ARE DI SMISSED. 8. APROPOS GROUND NO.4 OF ASSESSEES APPEAL; THE DI SALLOWANCE UNDER SECTION 14A OF THE INCOME TAX ACT, 1961(THE ACT) HA S BEEN CALCULATED WITH REFERENCE TO RULE 8D AS FOLLOWS: . / ITA NO. 5884&5930/MUM/2012 ' ' ' ' / ASSESSMENT YEAR 2008-09 9 (I) DIRECT EXPENDITURE : NIL (II) INTEREST X AVERAGE INVESTMENT GIVING RISE TO TAX FREE INCOME AVERAGE TOTAL ASSETS 95,24,981X (175,00,000+ 185,00,000)/2 (176,21,81,878 + 1 56,06,73,278)/2 : RS.10,34,917/- (III) 0.5% OF THE AVERAGE INVESTMENT OF 180,00,000/- : RS. 90,000/- TOTAL : RS. 11,24 ,917/- ACCORDINGLY, RS.11,24,917/- U/S.14A OF THE IT ACT, 196 1 IS DISALLOWED FROM BUSINESS EXPENSES. 8.1 AT THE OUTSET IT WAS SUBMITTED BY LD. AR THAT S O FAR AS IT RELATES TO 0.5% OF THE AVERAGE INVESTMENT I.E. A SUM OF RS.90,000/- THE ASSESSEE DOES NOT HAVE ANY GRIEVANCE AND ADDITION TO THAT EXTENT MAY BE SU STAINED. HOWEVER, LD. AR SUBMITTED THAT SO FAR AS IT RELATES TO OTHER COMPO NENTS OF RS.10,34,917/- THE ADDITION IS NOT WARRANTED AS THE ASSESSEE HAS ITS O WN SUFFICIENT FUNDS OUT OF WHICH INVESTMENT WAS MADE FROM WHERE THE ASSESSEE H AS EARNED TAX FREE INCOME. TO SUBSTANTIATE SUCH CONTENTION LD. AR HA S INVITED OUR ATTENTION TO THE FOLLOWING TABLES DESCRIBED AT PAGE 26 OF THE IM PUGNED ORDER OF LD. CIT(A). PARTICULARS YEAR ENDING MARCH 31,2008 YEAR ENDING M ARCH 31, 2007 PARTNERS CAPITAL ACCOUNT BALANCE 16,77,,16,198/- 17,62,32,074/- INVESTMENTS 1,85,00,000/- 1,75,00,000/- PROFITS EARNED IN THE PREVIOUS YEAR 2,20,53,938/- 2,51,92,895/- 8.2 REFERRING TO THE ABOVE TABLE IT WAS SUBMITTED BY HIM THAT INVESTMENT IS ONLY TO THE TUNE OF RS.1,85,00,000/- AND AGAINST TH AT THE PARTNERS CAPITAL AT THE BEGINNING OF THE YEAR IS RS.17.62 CRORES AND AT THE END OF THE YEAR RS.16.77 CRORES. HE FURTHER SUBMITTED THAT EVEN PROFIT EARN ED DURING THE YEAR WAS MORE THAN THE INVESTMENT ON WHICH THE ASSESSEE HAS EARNE D TAX FREE INCOME. HE . / ITA NO. 5884&5930/MUM/2012 ' ' ' ' / ASSESSMENT YEAR 2008-09 10 ALSO REFERRED TO ANOTHER TABLE WHICH IS DESCRIBED A T PAGE 28 OF THE CIT(A)S ORDER , WHICH READS AS UNDER: PARTICULARS AMOUNT BANK INTEREST PAID ON WORKING CAPITAL 85,600,521 BANK INTEREST PAID ON TERM LOANS FOR MACHINERY / CA R/OTHER FIXED ASSET 18,190 INTEREST PAID TO LOAN PARTIES 9,905,670 TOTAL 95,52 4,381 8.3 REFERRING TO ABOVE TABLE IT WAS SUBMITTED BY HI M THAT BANK INTEREST PAID BY THE ASSESSEE AMOUNTING TO RS.8,56,00,521/- PERTA INS TO BANK INTEREST PAID ON WORKING CAPITAL WHICH IS MAJOR PORTION OF A TOT AL INTEREST PAID AMOUNTING TO RS.9.55 CRORES. HE FURTHER SUBMITTED THAT IN SUBSE QUENT YEAR WHILE CALCULATING THE DISALLOWANCE UNDER RULE-8D THIS SUBMISSION WAS MADE BEFORE AO FOR EXCLUSION OF BANK INTEREST PAID ON WORKING CAPITAL AND SUCH PLEA OF THE ASSESSEE WAS ACCEPTED BY THE AO IN RESPECT OF A.Y 2 009-10. REFERENCE IN THIS REGARD WAS MADE TO THE ASSESSMENT ORDER DATED 7/5/2 013 IN RESPECT OF ASSESSMENT YEAR 2009-10, COPY OF WHICH IS PLACED AT PAGES 43 TO 46 OF THE PAPER BOOK AND THE DISALLOWANCE WAS COMPUTED AS UND ER: (I) DIRECT EXPENDITURE : NIL (II) INTEREST X AVERAGE INVESTMENT GIVING RISE TO TAX FREE INCOME AVERAGE TOTAL ASSETS 8576969 X (18500000 + 18500000)/2 (1560673278 + 882797274) /2 8576969 X 18500000 1221735276 : 1,29,876 (III) 0.5% OF THE AVERAGE INVESTMENT 0.5% OF RS. 18500000 : 92,500/- --------------- TOTAL RS. : 2,22,376/- ACCORDINGLY, RS.2,22,376/- U/S.14A OF THE IT ACT, 1961 IS DISALLOWED FROM BUSINESS EXPENSES. . / ITA NO. 5884&5930/MUM/2012 ' ' ' ' / ASSESSMENT YEAR 2008-09 11 FOR THE PURPOSE THAT WHERE ASSESSEE HAS ITS OWN SU FFICIENT FUNDS TO MAKE INVESTMENT FROM WHERE TAX FREE INCOME HAS BEEN EARN ED, NO ADDITION CAN BE MADE UNDER SECTION 14A R.W.R 8D, LD. AR HAS RELIED UPON THE FOLLOWING DECISIONS: (1) PARESH SHAH V. DCIT, ITA NO.8214/MUM/2011 FOR A.Y.2 008-09 ORDER DATED 05/06/2013 (2) M/S. PALM GROVE BEACH HOTELS PVT. LTD. ACIT, ITA NO .5678/MUM/2011 FOR A.Y. 2008-09 ORDER DATED 22.03.2013. (3) ALCHEMIC FINANCIAL SERVICES LTD. V. ADDL. CIT, ITA NO.6349/MUM/2011 FOR A.Y 2008-09 ORDER DATED 10/08/2012 (4) DCIT VS. JAY CHEMICAL INDUSTRIES LTD. , ITA NO.729/ AHD/2011 FOR A.Y. 2008-09 DATED 05/10/2012 8.4 ON THE OTHER HAND, LD. DR RELIED UPON THE ORDER PASSED BY AO AND LD. CIT(A). 8.5 WE HAVE HEARD BOTH THE PARTIES AND THEIR CONTE NTIONS HAVE CAREFULLY BEEN CONSIDERED. THE ARGUMENTS TAKEN BY LD. AR ARE SUPPORTED BY THE AFOREMENTIONED DECISIONS OF THE TRIBUNAL. IT HAS B EEN SHOWN THAT ASSESSEE HAS ITS OWN SUFFICIENT FUNDS WHICH ARE SUFFICIENT TO CO VER THE INVESTMENT FROM WHERE THE ASSESSEE HAS EARNED TAX FREE INCOME. MOREOVER, ON THE MAJOR PORTION OF THE INTEREST THE AO HAS ACCEPTED THE SUBMISSIONS OF THE ASSESSEE IN SUBSEQUENT YEAR, THEREFORE, WE ARE OF THE OPINION THAT ADDITIO N ON INTEREST COMPONENT IS NOT CALLED FOR. WE CONFIRM THE ADDITION TO THE EXTENT OF RS.90,000/- AND DELETE THE ADDITION OF RS.10,34,917/-. THIS GROUND IS PARTLY ALLOWED. 9. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS PARTLY ALLOWED AND THE APPEAL FILED BY THE REVENUE ID DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 04/02/2014 2 . 01' # 3 45 04/02/2014 1 . 6 % SD/- SD /- ( !' / N.K.BILLAIYA ) ( . . / I.P. BANSAL ) # / ACCOUNTANT MEMBER / JUDICIAL MEMBER MUMBAI; 4 DATED 04/02/2014 . / ITA NO. 5884&5930/MUM/2012 ' ' ' ' / ASSESSMENT YEAR 2008-09 12 2 2 2 2 . .. . ,/78 ,/78 ,/78 ,/78 98'/ 98'/ 98'/ 98'/ / COPY OF THE ORDER FORWARDED TO : 1. (+ / THE APPELLANT 2. ,-(+ / THE RESPONDENT. 3. : ( ) / THE CIT(A)- 4. : / CIT 5. 8;6 ,/ , , / DR, ITAT, MUMBAI 6. 6< = / GUARD FILE. 2 2 2 2 / BY ORDER, -8/ ,/ //TRUE COPY// > >> > / ? ? ? ? ) ) ) ) (DY./ASSTT. REGISTRAR) , / ITAT, MUMBAI . . ./ VM , SR. PS