ASST CIT 14(1), MUMBAI V. AMRATLAL & DHIRAJLAL & CO, MUMBAI

ITA 6928/MUM/2014

• Counselvise Citation: [2017] 128 COUNSELVISE.COM (IT) 8520 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 2 month(s) 17 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-01-2017
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Assessment Year: 2011-2012
• Appeal Filed On: 13-11-2014
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: B S BIST
• Assessee Lawyers: KSHIPRA SINGHVI
• Keywords: Transfer pricing; Additional evidence; Fair market value
• Section: 143(3); 144

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES A MUMBAI BEFORE SHRI MAHAVIR SINGH (JUDICIAL MEMBER) AND SHRI N.K. PRADHAN (ACCOUNTANT MEMBER) ITA NO. 6928/MUM/2014 ASSESSMENT YEAR: 2011-12 ACIT 14(1) VS. M/S. AMRATLAL & DHIRAJLAL & CO. R. NO. 204, 2 ND FLOOR, 412, LALSINGH BHAVAN, SHEIKH EARNEST HOUSE, NARIMAN POINT MEMON STREET, MUMBAI 400021 MUMBAI - 400002 PAN NO. AAHFA8103H (APPELLANT) (RESPONDENT) REVENUE BY : SHRI B.S. BIST, DR ASSESSEE BY: MS. KSHIPRA SINGHVI, AR DATE OF HEARING : 12/01/20 17 DATE OF PRONOUNCEMENT: 31/01/2017 ORDER PER N.K. PRADHAN, AM THIS IS AN APPEAL FILED BY THE REVENUE. THE RELEVAN T ASSESSMENT YEAR IS 2011-12. THE APPEAL IS DIRECTED AGAINST THE ORDER OF THE COMMISSIONER (APPEALS) 25, MUMBAI AND ARISES OUT OF ORDER U/S 143(3) OF THE INCOME TAX ACT 1961, (THE ACT). 2. THE GROUNDS OF APPEAL FILED BY THE REVENUE READ AS UNDER:- I. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, T HE CIT(A) HAS ERRED IN LAW BY DELETING ADDITION MADE U/S 40A(2) OF RS. 3,91,76,267 /- ON ACCOUNT UNREASONABLE AND EXCESSIVE EXPENDITURE AS THE ASSESSE E FAILED TO FURNISH THE DETAILS CALLED FOR DURING THE ASSESSMENT PROCEEDINGS, D ESPITE OF AMPLE OPPORTUNITY GIVEN. II. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, T HE CIT(A) ERRED IN DEVIATING FROM THE FINDINGS MADE BY THE AO IN THE ASS ESSMENT ORDER AND DELETING THE ADDITION BY IGNORING THE FACT THAT DUE TO NON-COMPLIANCE BY THE ITA NO. 6928/MUM/2014 2 ASSESSEE THE AO HAS COMPLETED THE ASSESSMENT U/S 144 OF THE INCOME TAX ACT, 1961. III. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AN D IN LAW, THE LD. CIT(A) ERRED IN ACCEPTING THE ADDITIONAL EVIDENCE SUBMITTED BY THE ASSESSEE DURING THE APPELLATE OF THE INCOME TAX RULES, 1962 AS DURIN G THE ASSESSMENT PROCEEDINGS THE ASSESSEE HAS NOT SUBMITTED THE RELEVA NT DETAILS EVEN AFTER REPEATED OPPORTUNITY GIVEN. IV. FOR THE ABOVE MENTIONED REASON AND ANY OTHER REASONS THAT MAY BE URGED AT THE TIME OF HEARING IT IS REQUESTED THAT THE ORDER OF THE CIT(A) BE QUASHED AND THAT OF THE A.O. BE RESTORED. 3. BRIEFLY STATED, THE FACTS ARE THAT THE ASSESSING OFFICER (AO) OBSERVED THAT THE ASSESSEE HAD MADE PURCHASES OF RS . 270.94 LACS FROM A RELATED CONCERN I.E. M/S. A TO Z RETAIL LTD. (ARL). THERE WAS AN AGREEMENT FOR SALE ON CONSIGNMENT BASIS BETWEEN ARL AND THE ASSESSEE, WHEREIN IT WAS PROVIDED THAT THE ASSESSEE WOULD PURCHASE STOCK FROM ARL AT A PRICE LESS THAN 5% OF MRP AND E VEN SELL THE PRODUCTS AT A PRICE LESS THAN MRP. THE ASSESSEE HAD GIVEN A NON- INTEREST BEARING DEPOSIT OF RS. 3 CRORES TO ARL FOR USE OF BRAND NAME A TO Z. THE AO CAME TO A FINDING THAT THE SAID CONTRACT APPARENTLY AIMED AT BENEFITTING THE RELATED PARTY AND HENCE SH OULD NOT BE CONSIDERED AS A GENUINE BUSINESS EXPENSE. IN ORDER TO GET THE FAIR MARKET VALUE OF GOODS AND SERVICES AS PER PROVISION S OF SECTION 40A (2), THE AO SPLIT THE PROFITS EARNED BY THE ASSESSE E ON ACCOUNT OF PURCHASES FROM ARL AND OTHERS AND ARRIVED AT GP RA TIO @8.20% AND 41.45% RESPECTIVELY. BY TAKING GP RATIO @41.45% FOR PURCHASES FROM ARL, THE AO ARRIVED AT THE EXCESS AMOUNT PAID OF RS . 3,91,76,264/-. THE AO THUS MADE AN ADDITION OF RS. 3,91,76,264/- T O THE INCOME SHOWN BY THE ASSESSEE. 4. THE ASSESSEE PREFERRED AN APPEAL BEFORE THE LEAR NED CIT(A). WE FIND THE FOLLOWING FACTS ARRIVED AT BY THE LEARNED CIT(A) I HAVE PERUSED FACTS OF THE CASE AND THE APPELLANT S SUBMISSIONS CAREFULLY. I FIND THAT THE ADDITION HAS BEEN MADE PRIMARILY ON THE BASIS OF DP RATIO CALCULATED BY A.O. FOUND LOWER IN THE CASE OF TRANSAC TIONS WITH RELATED PARTY ARL AT 8.20% AS AGAINST THE GP RATIO OF 41.45% IN RESPECT OF TRANSACTIONS WITH OTHERS. HOWEVER, ACCORDING TO APPELLANT, THE A. O. HAS TAKEN ARBITRARY FIGURES AND COMPUTED THE GP RATIO @41.45% . THE APPELLANT HAS SHOWN THAT ITS GP RATIO IS ACTUALLY 12% IN RESPECT OF RELATED PARTY AND 25.29% IN RESPECT OF OTHERS GIVING AN AVERAGE GP RATIO ON ENTIRE SALES @16.01% . THE A.O. HAS FURTHER CONTENDED THAT IN SUBSEQUENT A.Y. 2012-13, T HE MARGIN EARNED BY THE ITA NO. 6928/MUM/2014 3 FIRM IS AROUND 35%, WHICH ACCORDING TO HIM CONFIRMS THAT THE PURCHASE PRICE PAID TO RELATED PARTY IN THE YEAR UNDER CONSIDERATION I S OVER AND ABOVE THE FAIR MARKET VALUE THUS ATTRACTING PROVISIONS OF SEC TION 40A(2). IN THIS REGARD, THE APPELLANT HAS SHOWN BY FIGURES THAT ITS GP RATI O A.Y. 2012-13 WAS ONLY AT 6.3, AS AGAINST AROUND 35% ALLEGED BY THE A.O. IN THI S BACKGROUND, I FIND THAT THE VERY BASIS OF A.O.S IMPUGNED ADDITIONS ARE NOT BA SED ON CORRECT FINDING OF FACTS AND FIGURES 4.1 THE ASSESSEE SUBMITTED BEFORE THE LEARNED CIT(A ) THE AVERAGE GP RATE CALCULATED @18.40% OF FEW ESTABLISH ED COMPANIES IN THE SAME LINE OF BUSINESS. THE LEARNED CIT(A) NOTED THAT IN ORDER TO SET THE BENCH MARK, THE AO COULD H AVE FOUND THE COMPARABLE CASES HIMSELF AND CONFRONTED THE SAME TO THE ASSESSEE, OR ALTERNATIVELY COULD HAVE ASKED THE ASS ESSEE TO SUBMIT SUCH COMPARABLES. HOWEVER NO SUCH EXERCISE WAS DONE BY THE AO THE LEARNED CIT(A) ALSO OBSERVED THAT THE AO FAILED TO BRING ON RECORD RELEVANT FACTS TO SHOW THAT THE ASSESSEE AS A GROUP BENEFITED BY SHOWING EXCESSIVE OR UNREASONABLE EXPE NDITURE IN RESPECT OF TRANSACTIONS WITH RELATED PARTY. THEREFO RE, THE LEARNED CIT(A) DELETED THE ADDITION OF RS. 3,91,76,264/- MA DE BY THE AO U/S 40A(2) OF THE ACT. 5. THE LEARNED DR SUPPORTS THE ORDER PASSED BY THE AO. 6. THE LEARNED COUNSEL OF THE ASSESSEE RELIES ON TH E ORDER OF THE LEARNED CIT(A). SHE SUBMITS THAT THE INDUSTRY A VERAGE OF GROSS PROFIT IN SIMILAR BUSINESS IS 18.40% WHICH IS CLEAR FROM THE FOLLOWING DATA SL NO. COMPANY G.P. IN % 1 V-MART RETAIL LIMITED 29 2 BHATIA INDUSTRIES 8 3 BRANDHOUSE RETAILS LIMITED 16 4 V2 REATIL LIMITED 25 5 ANSHUS CLOTHING 14 ARITHMETIC MEAN 18.40 6.1 THE LEARNED COUNSEL OF THE ASSESSEE FURTHER SUB MITS THAT M/S. ARL WAS GIVING 10 12 MONTHS CREDIT TO THE AS SESSEE. SO THE ASSESSEE SAVES 12% TO 15% INTEREST ON THIS ACCOUNT ALONE. THE HIGHER GROSS PROFIT EARNED ON THE TRANSACTION WITH THIRD PARTIES (WHICH IS 25.29%) IS NOT COMPARABLE AS THEY WERE IN DIFFERENT SEGMENTS I.E. INSTITUTIONAL SALES AND ONE TIME ACTI VITY. FURTHER IT IS ITA NO. 6928/MUM/2014 4 STATED THAT THE AO HAS MENTIONED IN THE ASSESSMENT ORDER THAT IN THE A.Y. 2012-13, THE MARGIN OF THE ASSESSEE IS 35% . THIS IS FACTUALLY WRONG. IN FACT, THE MARGIN FOR THE A.Y. 2 012-13 IS ONLY 6.3%. THUS IT IS STATED THAT THE GP DECLARED BY THE ASSESSEE FOR THE IMPUGNED ASSESSMENT YEAR IS AT ARMS LENGTH PRICE A ND REASONABLE. 7. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT MATERIAL ON RECORD. WE FIND THAT THE GROSS PROFIT IN THE INSTANT CASE ON PURCHASE FROM M/S. ARL IS 12.22%. M /S. ARL IS GIVING 10 12 MONTHS CREDIT TO THE ASSESSEE. THUS THE ASSESSEE SAVES 12 TO 15% INTEREST ON THIS ACCOUNT ALONE. TAK EN TOGETHER THE ABOVE, THE GROSS PROFIT OF 24.22% ON PURCHASES FROM THE RELATED PARTY IS AT ARMS LENGTH PRICE. WE ALSO FIND THAT T HE MARGIN OF THE ASSESSEE IN THE A.Y. 2012-13 IS 6.3%. THE AO HAS WR ONGLY MENTIONED THE SAME AT 35%. 7.1 THE AO COULD HAVE CONFRONTED THE ASSESSEE TO PR OVE THE REASONABLENESS OF EXPENSES IN RESPECT OF TRANSACTIO NS WITH RELATED PARTIES. HE HAS NOT DONE SO. THE ASSESSEE IS NOT SU PPOSED TO SUO MOTO FILE ITS EXPLANATIONS. THE AO COULD HAVE FOUND THE COMPARABLE CASES HIMSELF AND CONFRONTED THE SAME TO THE ASSESSEE. HE HAS NOT DONE SO. ALTERNATIVELY, THE AO COULD HAVE ASKED THE ASSESSEE TO SUBMIT SUCH COMPARABLES. BUT THE AO HAS FAILED TO DO SO. 7.2 AS THE GROSS PROFIT OF 24.22% NARRATED HERE-IN- ABOVE IN THE CASE OF THE ASSESSEE ON PURCHASES FROM RELATED PART Y IS AT ARMS LENGTH PRICE, WE UPHOLD THE ORDER OF THE LEARNED CI T(A). 8. IN THE RESULT, THE APPEAL FILED BY THE REVENUE I S DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 31/01/2017 SD/- SD/- (MAHAVIR SINGH) (N. K. PRADHAN) JUDICIAL MEMBER ACCOUNTANT MEMBE R MUMBAI; DATED: 31/01/2017 BISWAJIT, SR. P.S. ITA NO. 6928/MUM/2014 5 COPY OF THE ORDER FORWARDED TO : 1. THE APPELLANT 2. THE RESPONDENT. 3. THE CIT(A) - 4. CIT 5. DR, ITAT, MUMBAI 6. GUARD FILE . BY ORDER, //TRUE COPY// (DY./ASSTT. REGISTRAR) ITAT, MUMBAI