PRAKASH H. PATEL, THANE V. ASST CIT CIR 2, THANE

ITA 6852/MUM/2013

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 92369 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 4 month(s) 26 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 23-04-2015
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: C
• Assessment Year: 2009-2010
• Appeal Filed On: 27-11-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: PREMCHAND J
• Assessee Lawyers: GAIUTAM SALECHA
• Keywords: Fair market value; Arm length price

Judgement Text

, IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES F MUMBAI . . , , BEFORE SHRI I.P. BANSAL, JUDICIAL MEMBER AND SHRI N.K.BILLAIYA, ACCOUNTANT MEMBER . / ITA NO. 6852/MUM/2013 / ASSESSMENT YEAR 2009-10 MR.PRAKASH H. PATEL, GALA NO.8, MARUTI INDUSTRIAL ESTATE, PANCHAL ROAD, BEHIND SYNDICATE BANK, BHAYANDER (E), THANE 401105 / VS. THE ACIT, CIR.2, THANE. ! ./ ./ PAN/GIR NO. : AMSPP2670F ( !$ / APPELLANT ) .. ( %&!$ / RESPONDENT ) ASSESSEE BY SHRI GAIUTAM SALECHA RESPONDENT BY : SHRI PREMCHAND J. ( ) * / DATE OF HEARING : 23/04/2015 ( ) * / DATE OF PRONOUNCEMENT : 23/04/2015 / O R D E R PER I.P.BANSAL, JM: THIS IS AN APPEAL FILED BY THE ASSESSEE AND IT IS DIRECTED AGAINST ORDER PASSED BY LD. CIT(A)-II,THANE DATED 12/9/2013 FOR A SSESSMENT YEAR 2009-10. GROUNDS OF APPEAL READ AS UNDER: I. TRANSACTION FOR PURCHASE OF GOODS AT ARM LENGTH PRICE AND INTEREST @ 15% BEING INCIDENTAL TO SAID TRANSACTIONS, 1. THE LEARNED CIT{A) FAILED TO APPRECIATE THE FACT THAT TRANSACTIONS WITH BHAWANI UTENSILS INDUSTRIES PVT LTD (HEREINAFTER RE FERRED AS BUIPL) FOR PURCHASE OF GOODS WERE AT ARM'S LENGTH PRICE AND NO DISCREPANCIES ON . / ITA NO. 6852/MUM/2013 / ASSESSMENT YEAR 2009-10 2 SAME WERE FOUND. THE LEVYING OF INTEREST WAS INCID ENTAL TO NON - PAYMENT/DELAY IN PAYMENT AS PER TERMS & CONDITIONS OF PURCHASES OF GOODS AS COST OF DEBT TO BUIPL WAS AT THE RATE OF 1 5% ON ACCOUNT OF LOAN FROM UNION BANK OF INDIA - UBI, THEREFORE CHARGING INTEREST WAS REASONABLE AND CORRECT IN LAW. 2. THE LEARNED CIT{A) ERRED IN UNDERSTANDING THAT I NTEREST RATE CHARGED TO BUIPL WERE NOT UNDER THE SAME FACTS AND CIRCUMSTANC ES THAT OF, TO OTHER RELATED PARTY- BHAWANI UTENSILS ( HEREINAFTER REFER RED TO AS BU). 3. THE LEARNED CIT{A) FAILED TO APPRECIATE THE FACT THAT TERM OF PURCHASE WITH BU WERE ALREADY DECIDED IN PRECEDING YEAR AND IN YEAR UNDER CONSIDERATION THERE WERE NO PURCHASES FROM BU. IT WAS DUE TO NON -PAYME NT OF LAST YEAR'S PAYMENT, INTEREST WAS INCIDENTAL TO NON -PAYMENT OF DUES AND NOT ON ACCOUNT OF PURCHASES. THEREFORE, COMPARING PURCHASE S FROM TWO DIFFERENT SUPPLIER HAVING DIFFERENT TERMS OF CONDITION AND MO RE PARTICULARLY OF DIFFERENT YEAR AND HAVING DIFFERENT BUSINESS SCENAR IO IS NOT FAIR AND PROPER. II. NON - CONSIDERATION OF GROUND NO. 2 1. THE LEARNED CIT(A) HAS ERRED IN UPHOLDING GROUND NO.2, BY NOT CONSIDERING THE SAME, WHICH IS READ AS UNDER- 2. THE ASSESSING OFFICER FAILS TO ACKNOWLEDGE THAT BUIPL HAS TAKEN THE DELAYED/INTEREST CHARGES AS INCOME AND WAS OFFERED TO TAX IN RETURN OF INCOME. THEREFORE THE SAME IS BAD IN LAW'. ADDING OF INTEREST IN THE HAND OF APPELLANT WILL LE AD TO DOUBLE TAXATION. THE OBJECT OF SECTION 40(A)(2) IS TO CHECK TAX EVASION THROUGH EXCESSIVE AND UNREASONABLE PAYMENTS TO RELATIVE OR ANY OTHER SPECIFIED PERSON, WHICH APPELLANT NEVER INTEN TS TO DO AS SAME WAS OFFERED TO TAX AT EQUIVALENT RATE , WITH NO LOSS TO REVENUE, IN THE HAND OF BUIPL- RELATED PARTY. 2. AT THE TIME OF HEARING, IT WAS SUBMITTED BY LD. AR THAT THE ONLY GRIEVANCE OF THE ASSESSEE IN THE PRESENT APPEAL IS REGARDING ADDITION OF RS.7,64,110/-, WHICH WAS ADDED BY THE AO TO THE INCOME OF ASSESS EE ON ACCOUNT OF INTEREST EXCESSIVELY PAID TO ONE OF THE RELATED PARTIES. . / ITA NO. 6852/MUM/2013 / ASSESSMENT YEAR 2009-10 3 3. NARRATING THE FACTS IT WAS SUBMITTED THAT ASSES SEE MADE PURCHASES FROM TWO RELATED PARTIES AND ON BELATED PAYMENT INTEREST WAS PAID, THE DETAILS ARE AS UNDER: BHAVANI UTENSILS 1,85,795/- BHAVANI UTENSILS INDUSTRIES PVT. LTD. 19,10,278/- 3.1 THE ABOVE DETAIL WAS PROVIDED IN THE AUDIT REPO RT WHILE STATING THE PAYMENTS MADE TO RELATED PARTING FALLING UNDER SECT ION 40A(2)(A) OF THE INCOME TAX ACT 1961(THE ACT). THE AO REQUIRED THE ASSESSE E TO FILE THE DETAILS. IT WAS REVEALED THAT TO BHAVANI UTENSILS THE ASSESSEE HAD PAID INTEREST @ 9%, HOWEVER, TO OTHER PARTIES NAMELY BHAVANI UTENSISL I NDUSTRIES PVT. LTD. THE INTEREST PAYMENT WAS MADE @15%. THESE INTERESTS WE RE PAID FOR THE PAYMENT MADE BEYOND 15 DAYS FROM THE DATE OF PURCHASES. TH E AO DISALLOWED A SUM OF RS.7,64,000/- WITH THE FOLLOWING OBSERVATIONS: 9. THE CONTENTION OF THE ASSESSEE IS CAREFULLY CON SIDERED WITH FOLLOWING COMMENTS:- AS REGARDS POINT NO. 1 (A) & 1 (B) AS SUBMITTED B Y THE ASSESSEE, IT IS NOT THE UNDERSIGNED WHO HAS DRAWN ANY CONCLUSION REGARDING 'RELATED PARTY'. IT HAS BEEN MENTIONED IN THE AUDIT REPORT ITSELF, WHICH HA S BEEN INCIDENTALLY PREPARED AND CERTIFIED BY AR HIMSELF. THUS THE AR IS CONTRAD ICTING HIS OWN AUDIT REPORT HERE. BUT THE INTEREST PAID / PAYABLE TO M/S BHAWANI UT ENSILS PVT. LTD. @ 15 % CANNOT BE SAID TO BE AT 'ARM'S LENGTH'. WHEN THE AS SESSEE IS DECIDING THE INTEREST PAYABLE TO ONE OF IT'S 'RELATED PARTY', @ 9%, IT SE EMS ILLOGICAL THAT HE DOES NOT APPLY THE SAME PRINCIPAL TO' OTHER 'RELATED PARTY' AS WELL. HENCE INSTEAD OF ALLOWING INTEREST TO M/S BHAWANI UTENSILS PVT. LTD. OF RS. 19,10,278/- @ 15, THE UNDERSIGNED ALLOWS INTEREST @ 9 % WHICH STANDS AT R S. 11, 46,167 L-, THE REMAINING PORTION OF RS.7,64,110/- IS ADDED BACK TO ASSESSEE'S TOTAL INCOME.' *PENALTY PROCEEDINGS U/S. 271 (1) (C) OF THE IT ACT , 1961 ARE INITIATED SEPARATELY FOR CONCEALMENT OF INCOME. AS REGARDS ASSESSEE'S EXPLANATION PERTAINING TO T HE INTEREST PAYMENT TO M/S BHAWANI UTENSILS, THE SAME IS ACCEPTED AS THE INTER EST PAID/ PAYABLE TO THE SAID ENTITY IS AT THE RATE OF 9 %. 3.2 AGGRIEVED, THE ASSESSEE FILED AN APPEAL BEFORE LD. CIT(A) WHO HAS CONFIRMED THE ACTION OF THE AO. IN THE SUBMISSION M ADE BEFORE LD. CIT(A,) IT . / ITA NO. 6852/MUM/2013 / ASSESSMENT YEAR 2009-10 4 WAS SUBMITTED THAT THE RELATED CONCERN NAMELY BHAVA NI UTENSIL INDUSTRIES PVT. LTD. WAS HAVING WORKING CAPITAL LOAN FROM UNIO N BANK OF INDIA, WHICH WAS BEARING INTEREST @ 14.25% AND AFTER CONSIDERING THI S RATE OF INTEREST, MINIMAL ADMINISTRATIVE/NOMINAL MARGIN, RATE OF 15% WAS CONS IDERED TO BE REASONABLE AND FAIR. THUS, IT WAS SUBMITTED THAT DISALLOWANCE IS NOT JUSTIFIED EVEN UNDER SECTION 40A(2)(A) OF THE ACT. RELIANCE WAS PLACED ON THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF UPPER INDIA PUBLISHIN G HOUSE PVT. LTD. VS. CIT 117 ITR 569(SC) TO CONTEND THAT AS PER WELL ESTABLI SHED LAW PROVISIONS OF SECTION 40A(2)(A) OF THE ACT CANNOT HAVE ANY APPLI CATION UNLESS IT IS FIRST CONCLUDED THAT THE EXPENDITURE WAS EXCESSIVE OR UNR EASONABLE. IT WAS SUBMITTED THAT KEEPING IN VIEW THE PROVISIONS OF SE CTION 40A(2)(A), FIRST FAIR MARKET VALUE OF THE GOODS, SERVICES OR FACILITIES W AS TO BE DETERMINED. SECONDLY, LEGITIMATE NEEDS OF THE BUSINESS OF THE A SSESSEE IS TO BE KEPT IN CONSIDERATION AND THIRDLY, BENEFIT DERIVED BY OR AC CRUING TO THE ASSESSEE ON RECEIPT OF SUCH GOODS, SERVICES OR FACILITIES HAS TO BE TAKEN INTO CONSIDERATION. IT WAS SUBMITTED THAT AO HAS COMMITTED AN ERROR IN DISALLOWING THE INTEREST OF MORE THAN 9% ONLY ON THE GROUND THAT INTEREST @9% W AS GIVEN TO OTHER RELATED PARTY. HOWEVER, LD. CIT(A) DID NOT ACCEPT SUCH SUB MISSIONS OF THE ASSESSEE. LD. CIT(A) HAS ADOPTED ANOTHER LOGIC OF GROSS PROFI T EARNED BY THE ASSESSEE WHICH IS 7% AND IF THAT RATE IS APPLIED TO THE PUR CHASES MADE BY THE ASSESSEE FROM BHAGWAN UTENSILS PVT. LTD., THEN THE EARNING O F THE ASSESSEE FROM THE PURCHASES MADE WOULD A SUM OF RS.18,55,740/- AGAINS T WHICH ASSESSEE HAS PAID INTEREST OF RS.19,10,278/-. THUS, IT IS CLEAR THAT THE BENEFIT DERIVED OR ACCRUED TO THE ASSESSEE AS A RESULT OF PURCHASES MA DE FROM BHAVANI UTENSILS INDUSTRIES PVT. LTD. IS LESS THAN THE INTEREST EXPE NDITURE. THUS, IN THIS MANNER LD. CIT(A) HAS UPHELD THE DISALLOWANCE MADE BY THE AO. 4. REFERRING TO THE ABOVE FACTS, IT WAS SUBMITTED B Y LD. AR THAT DISALLOWANCES IS MADE BY THE AO IN ACCORDANCE WITH THE PROVISIONS OF SECTION 40A(2)(A), WHICH PROVIDES THAT WHERE THE ASSESSEE INCURS ANY EXPENDITURE IN . / ITA NO. 6852/MUM/2013 / ASSESSMENT YEAR 2009-10 5 RESPECT OF WHICH PAYMENT HAS BEEN MADE TO A PERSON REFERRED TO IN CLAUSE (B) AND THE AO IS OF THE OPINION THAT SUCH EXPENDITURE IS EXCESSIVE OR UNREASONABLE HAVING REGARD TO THE FAIR MARKET VALU E OF THE GOODS, SERVICES OR FACILITIES FOR WHICH THE PAYMENT IS MADE OR THE LEG ITIMATE NEEDS OF THE BUSINESS OR PROVISION OF THE ASSESSEE OR THE BENEFIT DERIVED BY OR ACCRUING TO HIM THERE FROM, SO MUCH OF THE OF THE EXPENDITURE AS IS SO C ONSIDERED BY HIM TO BE EXCESSIVE OR UNREASONABLE SHALL NOT BE ALLOWED AS A DEDUCTION. IT WAS SUBMITTED THAT ACCORDING TO FACTS OF THE CASE, FAIR MARKET VALUE OF THE DELAYED PAYMENTS OF THE PURCHASE PRICE WAS NEITHER EXCESSIV E NOR UNREASONABLE, THEREFORE, WOULD FALL OUTSIDE THE PURVIEW OF SECTI ON 40A(2)(A) OF THE ACT. THUS, IT WAS PLEADED BY LD. AR THAT THE ADDITION MADE BY AO AND CONFIRMED BY LD. CIT(A) SHOULD BE DELETED AND APPEAL FILED BY THE AS SESSEE BE ALLOWED. 5. ON THE OTHER HAND, LD. DR RELYING UPON THE ORDER PASSED BY AO AND REASONING GIVEN BY LD. CIT(A) SUBMITTED THAT DISALL OWANCE HAS RIGHTLY BEEN UPHELD BY LD. CIT(A) AND HIS ORDER SHOULD BE UPHELD AND THE APPEAL FILED BY THE ASSESSEE SHOULD BE DISMISSED. 6. WE HAVE HEARD BOTH THE PARTIES AND THEIR CONTENT IONS HAVE CAREFULLY BEEN CONSIDERED. IN OUR CONSIDERED OPINION PROVISIONS O F SECTION 40A(2)(A) HAVE BEEN WRONGLY INVOKED. THE CONTENTION OF THE ASSESSEE TH AT THE RELATED PARTY HAS OBTAINED LOAN FROM BANK FOR WORKING CAPITAL, THE IN TEREST RATE OF WHICH IS 14.25% IS NOT CONTRADICTED OR FOUND INCORRECT. IF IT IS SO, THE INTEREST PAYMENT MADE BY THE ASSESSEE @15% CANNOT BE SAID TO BE EITH ER EXCESSIVE OR UNREASONABLE HAVING REGARD TO THE FAIR MARKET VALUE OF THE FACILITY OBTAINED BY THE ASSESSEE FROM ITS RELATED CONCERNS. THE PAYMEN T OF INTEREST @9% TO OTHER RELATED PARTIES CANNOT BE A GROUND TO DISALLOW THE INTEREST PAID @15% TO BHAVANI UTENSILS INDUSTRIES PVT. LTD. AS THE DISA LLOWANCE UNDER SECTION 40A(20(A) HAS TO BE JUDGED FROM THE PARAMETERS DESC RIBED IN THAT SECTION. . / ITA NO. 6852/MUM/2013 / ASSESSMENT YEAR 2009-10 6 ACCORDING TO THE PROVISIONS OF SECTION 40A(2)(A) TH E DISALLOWANCE IN THE FACTS OF THE CASE IS NOT WARRANTED, THEREFORE, DELETED. 7. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 23/04/2015 ( 0 1 2 23/04/2015 ( SD/- SD/- ( / N.K.BILLAIYA ) ( . . / I.P. BANSAL ) / ACCOUNTANT MEMBER / JUDICIAL MEMBER MUMBAI; 1 DATED 23/04/2015 / COPY OF THE ORDER FORWARDED TO : 1. !$ / THE APPELLANT 2. %&!$ / THE RESPONDENT. 3. 4) ( ) / THE CIT(A)- 4. 4) / CIT 5. 56 %)78 , * 78 , / DR, ITAT, MUMBAI 6. 9 / GUARD FILE. / BY ORDER, & 5) %) //TRUE COPY// / (DY./ASSTT. REGISTRAR) , / ITAT, MUMBAI . . ./ VM , SR. PS