GARWARE POLYESTER LTD, MUMBAI V. DCIT 8(1), MUMBAI

ITA 7820/MUM/2010

• Counselvise Citation: [2012] 119 COUNSELVISE.COM (IT) 9228 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 1 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 19-12-2012
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: K
• Next Hearing Date: 25-10-2012
• Assessment Year: 2006-2007
• Appeal Filed On: 12-11-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: AJEET KUMAR
• Keywords: Transfer pricing; Opportunity of being heard; International transaction; Earning of tax free income; Proportionate interest
• Section: 92C; 143(3); 14A

Judgement Text

, , , , IN THE INCOME TAX APPELLATE TRIBUNAL K BENCH, MUMBAI . , , ! ! ! ! '# $% '# $% '# $% '# $% , ,, , & & & & ' ' ' ' BEFORE SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER AND SHRI AMIT SHUKLA, JUDICIAL MEMBER . / ITA NO. 7820/MUM./2010 ( &) * !+* / ASSESSMENT YEAR : 200607 ) M/S. GARWARE POLYESTER LTD. GARWARE HOUSE, 50A SWAMI NITYANAND MARG VILE PARLE (EAST), MUMBAI 400 057 .. ,- / APPELLANT ) V/S DY. COMMISSIONER OF INCOME TAX CIRCLE8(1), AAYAKAR BHAVAN 101, M.K. ROAD, MUMBAI 400 020 .... ./,- / RESPONDENT , . / PERMANENT ACCOUNT NUMBER AAACG0571D &) *1# 2 3 / ASSESSEE BY : MR. VIJAY MEHTA 4! 2 3 / REVENUE BY : MR. AJEET KUMAR )! 2 # / DATE OF HEARING 01.11.2012 $ 5+ 2 # / DATE OF ORDER 19.12.2012 $ $ $ $ / ORDER ./ ./ ./ ./ PER BENCH THE PRESENT APPEAL PREFERRED BY THE ASSESSEE, IS DI RECTED AGAINST THE FINAL IMPUGNED ASSESSMENT ORDER DATED 13 TH SEPTEMBER 2010, WHICH WAS PASSED IN PURSUANCE OF THE DIRECTIONS GIVEN BY THE DISPUTE RESOLUTION PANELI (FOR SHORT DRP ), MUMBAI, FOR THE QUANTUM OF ASSESSMENT PASSED M/S. GARWARE POLYESTER LTD. 2 UNDER SECTION 144C R/W SECTION 143(3) OF THE INCOME TAX ACT, 1961 (FOR SHORT THE ACT ) FOR THE ASSESSMENT YEAR 200607. 2. IN GROUND NO.1, THE ASSESSEE HAS CHALLENGED TRANSFE R PRICING ADJUSTMENT OF ` 2,00,47,316, IN RESPECT OF INTERNATIONAL TRANSACTI ONS OF SALE OF POLYESTER FILM PRODUCTS BY THE ASSESSEE TO ITS TWO ASSOCIATED ENTERPRISES (FOR SHORT A.ES ). 3. AT THE OUTSET, THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT THIS ISSUE IS IDENTICAL TO THE ISSUE ARISING OUT OF GROUND NO.1, OF REVENUES APPEAL IN ITA NO.4444/MUM./2011, OF EVEN DATE IN AS SESSEES OWN CASE FOR ASSESSMENT YEAR 200506. THEREFORE, THE SUBMIS SIONS MADE THEREIN AND THE FINDINGS GIVEN IN THE SAID APPEAL WILL APPL Y MUTATIS MUTANDIS IN THIS YEAR ALSO. 4. LEARNED DEPARTMENTAL REPRESENTATIVE DID NOT OBJECT TO THE SUBMISSIONS OF THE LEARNED COUNSEL FOR THE ASSESSEE . 5. AFTER CAREFULLY CONSIDERING THE RIVAL SUBMISSIONS O F THE PARTIES AND THE ORDERS PASSED BY THE TPO U/S 92CA(3) OF THE ACT AS WELL AS DIRECTIONS GIVEN BY THE DRP, WE FIND THAT IN THIS YEAR, THE TP O HAS MADE ADJUSTMENT ON ACCOUNT OF SALE OF POLYESTER FILM PRODUCTS BY IT S TWO A.ES I.E., M/S. GLOBAL PET FILMS, INC. (GPF) AND GARWARE POLYESTER INTERNATIONAL LTD. (GPIL) FOR SUMS AGGREGATING ` 2,00,49,316. THE ASSESSEE HAS BENCH MARKED ITS ALP IN ITS TRANSFER PRICING STUDY REPORT FOLLOWING CUP METHOD IN THE FOLLOWING MANNER: S.NO. NATURE OF TRANSACTION AMOUNT ( ` ) METHOD 1. SALES OF PLAIN FILM TO GPF 12,96,15,000 CUP 2. SALE OF SUN CONTROL FILM TO GPIL 9,15,53,000 CUP 3. SALE OF SUN CONTROL FILM TO GPF 38,76,84,000 CUP 4. PAYMENT OF COMMISSION TO GPIL 16,34,327 CUP 6. THE ASSESSEE HAS COMPARED THE LOCAL SALES IN INDIAN MARKET WITH THE PRICE CHARGED FROM THE A.E. AFTER CONSIDERING THE A VERAGE PRICE IN RESPECT M/S. GARWARE POLYESTER LTD. 3 OF VARIOUS QUALITIES OF POLYESTER FILMS SOLD. THE T PO HELD THAT THIS IS NOT A CORRECT APPROACH AND THIRD PARTY EXPORT MADE BY THE ASSESSEE TO DIFFERENT COUNTRIES WHERE THE ASSESSEE DEALING THROUGH NONA. E. FOREIGN AGENTS SHOULD BE CONSIDERED AND THE AVERAGE PRICE CHARGED FROM NONA.ES SHOULD BE BENCH MARKED FOR DETERMINING THE ALP. THIS ISSUE HAS COME UP FOR CONSIDERATION BY A COORDINATE BENCH OF THIS TRIBUN AL IN THE ASSESSEES OWN CASE IN ITA NO.4444/MUM./2011, FOR ASSESSMENT Y EAR 200506, VIDE ORDER OF EVEN DATE 19 TH DECEMBER 2012, WHEREIN THE ORDER PASSED BY THE LEARNED COMMISSIONER (APPEALS) HAS BEEN SET ASIDE A ND THE MATTER HAS BEEN RESTORED TO THE FILE OF THE TPO AFTER OBSERVIN G AND HOLDING AS UNDER: 17. WE HAVE CAREFULLY CONSIDERED THE RIVAL CONTENT IONS OF THE PARTIES, PERUSED THE FINDINGS GIVEN BY THE TPO AS W ELL AS BY THE COMMISSIONER (APPEALS). THE ASSESSEE IS ENGAGED IN THE BUSINESS OF MANUFACTURE AND SALE OF VARIOUS TYPES OF POLYEST ER FILMS AND SUN CONTROL FILMS. FOR EXPORTING ITS PRODUCTS, THE ASSE SSEE HAS TWO TYPES OF SETUPS FOR EXPORT SALES FIRSTLY, INDEPE NDENT AGENTS (FOR SHORT NONA.E. AGENTS) OPERATING IN ASIAN COUNTRI ES, AFRICAN COUNTRIES, MIDDLE EAST, FAR EAST, RUSSIA AND OTHER CIS COUNTRIES, WHICH ARE MOSTLY DEVELOPING MARKETS AND SECONDLY, T HROUGH TWO SUBSIDIARY COMPANIES WHICH ARE TERMED AS A.E AND ARE OPERATING IN AMERICAN AND EUROPEAN MARKETS WHICH ARE DEVELOPE D MARKETS. THE ASSESSEE HAS BENCH MARKED ITS INTERNATIONAL TRA NSACTIONS WITH ITS A.ES BY APPLYING CUP METHOD, WHEREIN AVERAGE P RICE CHARGED TO A.ES HAVE BEEN COMPARED WITH THE AVERAGE EXPORT PRI CES CHARGED TO LOCAL CUSTOMERS IN INDIA. THE TPO HAS REJECTED T HE ASSESSEES COMPARISON OF EXPORT SALES CHARGED TO A.ES WITH LOC AL SALES PRICE AND COMPARED THE AVERAGE NONA.E. EXPORT PRICE WITH THE PRICE CHARGED TO TWO A.ES. THE LEARNED COMMISSIONER (APPE ALS) ACCEPTED THE CONTENTIONS OF THE ASSESSEE THAT THE TPO HAS FA ILED TO TAKE INTO CONSIDERATION THE GEOGRAPHICAL, ECONOMICAL MARKET D IFFERENCES WHERE THE A.E AND NONA.E. AGENTS ARE CARRYING OUT THEIR BUSINESS ACTIVITIES. HE ALSO APPRECIATED THAT THE EXPORT PRI CE OF THE PROCEEDS VARIES CONSIDERABLY FROM COUNTRY TO COUNTRY AND SPE CIFICALLY IN A DEVELOPED MARKET OF U.S. AND U.K. IN COMPARISON TO ASIAN AND AFRICAN COUNTRIES. HE ANALYSED THE PRICES AND ALSO THE NATURE OF MARKET WHICH HAS BEEN ADVERTUM DISCUSSED IN DETAIL IN THE FOREGOING PARAGRAPHS. HOWEVER, AFTER HAVING COME TO THE CONCLUSION THAT THE TPOS APPROACH IS NOT CORRECT A ND HE HAS NOT TAKEN INTO ACCOUNT THE VITAL FACTOR OF GEOGRAPHICAL , ECONOMICAL MARKET DIFFERENCES, HELD THAT EVEN THE ASSESSEES A PPROACH IS ALSO NOT ACCEPTABLE AS THE GEOGRAPHICAL DIFFERENCE DOE S EXISTS BETWEEN THE INDIAN MARKET ON ONE HAND AND AMERICAN & EUROPEAN MARKETS ON THE OTHER HAND. THUS, ON THE SAME LOGIC, HE REJECTED THE ASSESSEES APPROACH FOR BENCH MARKING THE ALP O F ITS TRANSACTIONS WITH THE A.E. THIS HAS BEEN DISCUSSED IN PARA3.32 AS REPRODUCED ABOVE. M/S. GARWARE POLYESTER LTD. 4 18. AFTER HAVING REJECTED THE APPROACH OF THE TPO A S WELL AS THE ASSESSEE, HE ADMITTED THAT THERE ARE NO DIRECT COMP ARABLE UN CONTROL TRANSACTIONS TO BENCH MARK THE ALP OF THE A .ES AS THEIR MARKET PRICES PREVAILING IN THE CONCERNED GEOGRAPHI CAL COUNTRIES I.E., U.S.A. AND EUROPE HAS TO BE SEEN SUBJECT TO C ERTAIN ADJUSTMENT OF EXPENSES. THE SALE PRICES CHARGED TO SUCH THIRD PARTY UNRELATED CUSTOMERS REPRESENTS COMPARABLE UNCONTRO L PRICES ON AGGREGATE BASIS IN THE RESPECTIVE COMPARABLE MARKET UNDER COMPARABLE CIRCUMSTANCES. HE EVEN WENT TO ANALYSE T HE PROFIT RATIO AND OPERATING EXPENSES OF THE A.ES AND HELD THAT TH ESE A.ES ARE RUNNING INTO LOSSES AND NO THIRD PARTY WILL CARRY S UCH BUSINESS AT LOSS. IN THIS MANNER, THE LEARNED COMMISSIONER (APP EALS) HAS MADE THESE A.ES AS TESTED PARTIES AND WITHOUT LOOKI NG INTO THE INDEPENDENT COMPARABLES OPERATING IN THE SAME KIND OF PRODUCTS IN THE SAID COUNTRIES, HE ACCEPTED THE OPERATING MARGI N OF THE A.ES. THIS IS WHERE THE LEARNED COMMISSIONER (APPEALS) WE NT ON A WRONG FOOTING AND INCORRECT APPROACH. ONCE THE LEARNED CO MMISSIONER (APPEALS) ACCEPTED THAT THE CUP IS THE APPROPRIATE METHOD, THEN HE HAS TO EXAMINE WHETHER THERE ARE ANY INTERNAL CO MPARABLES OR ANY EXTERNAL COMPARABLES. IN THE PRESENT CASE, ONCE HE HAS HELD THAT THERE ARE NO INTERNAL COMPARABLES, HE WAS REQU IRED TO LOOK INTO EXTERNAL COMPARABLES OPERATING OR DEALING WITH THE SIMILAR PRODUCTS UNDER SIMILAR TERMS IN A SIMILAR MARKET CONDITIONS WHERE THESE A.ES ARE OPERATING, WHICH HE FAILED TO DO SO AND SIMPLY ACCEPTED THE TRADING RESULTS OF THE A.ES. UNDER THE CUP METHOD, THE PRICE OF THE GOODS OR SERVICES IS DIRECTLY COMPARED WITH THE PRI CE IN UNCONTROL TRANSACTIONS UNDER SIMILAR CONDITIONS. INTERNAL CUP WOULD BE AVAILABLE IF THE ASSESSEE OR ITS GROUP ENTITY ENTER S INTO A COMPARABLE TRANSACTION WITH UNRELATED PARTY WHERE T HE GOODS OR SERVICES UNDER CONSIDERATION ARE SAME OR SIMILAR. O N THE OTHER HAND, THERE COULD BE AN EXTERNAL CUP IF A TRANSACTI ON BETWEEN TWO INDEPENDENT ENTERPRISES INVOLVES COMPARABLE GOODS O R SERVICES UNDER COMPARABLE CONDITIONS. THE CUP METHOD ALSO RE QUIRES A VERY HIGH DEGREE OF COMPARABILITY WITH REGARD TO THE QUA LITY OF PRODUCTS OR SERVICES, CONTRACTUAL TERMS, LEVEL OF THE MARKET , GEOGRAPHICAL MARKET IN WHICH THE TRANSACTION TAKES PLACE AND HOS T OF OTHER FACTORS. 19. ONCE THE LEARNED COMMISSIONER (APPEALS) FOUND T HAT THERE ARE SO MUCH OF VARIABLES FOR APPLYING EITHER INTERN AL CUPS AND HAS NOT APPLIED EXTERNAL CUP, PROBABLY, DUE TO THIS FAC TOR, THEN THE ENTIRE APPLICATION OF CUP FAILS IN THIS CASE. THE L EARNED COMMISSIONER (APPEALS) CANNOT GO TO EXAMINE, INDEPE NDENTLY THE OPERATING EXPENDITURE AND OPERATING PROFITS OF THE A.ES FOR DETERMINING THE ALP. A COMPARABILITY ANALYSIS HAS T O BE CARRIED OUT FOR DETERMINING THE ALP. PROVISIONS OF SECTION 92C PROVIDES COMPUTATION OF ALP AND ENVISAGES THAT THE ALP IN RE LATION TO AN INTERNATIONAL TRANSACTION SHALL BE DETERMINED BY AN Y OF THE METHODS PRESCRIBED THEREIN, BEING THE MOST APPROPRIATE METH OD HAVING REGARD TO THE NATURE OF TRANSACTIONS OR CLASS OF TR ANSACTIONS OR CLASS OF ASSOCIATED PERSONS OR FUNCTIONS PERFORMED TO SUC H PERSONS. FOR THIS PURPOSE, SIX METHODS HAVE BEEN SPELT OUT. SUB SECTION (2) OF SECTION 92C PROVIDES THAT THE MOST APPROPRIATE METH OD REFERRED TO M/S. GARWARE POLYESTER LTD. 5 IN SUBSECTION (1) SHALL BE APPLIED FOR DETERMINATI ON OF ALP. THUS, FOR COMPUTATION ON EXAMINING OF ALP, ONE OF THE MOS T APPROPRIATE METHODS HAS TO BE APPLIED. ONCE THE CUP METHOD FAIL S IN THIS CASE, THEN IT WAS REQUIRED BY THE LEARNED COMMISSIONER (A PPEALS) TO LOOK INTO FOR OTHER APPROPRIATE METHODS. NOW, THE QUESTI ON IS WHAT SHOULD BE THE MOST APPROPRIATE METHOD. AT THE TIME OF HEARING, BOTH THE PARTIES AGREED THAT IN CASE CUP METHOD IS FAILED, THEN TNMM CAN BE ADOPTED AS MOST APPROPRIATE METHOD, WHE REIN THE ALP IS DETERMINED BY COMPARING THE OPERATING PROFIT RELATIVE TO APPROPRIATE BASE VIZ. COST AS WELL AS ASSET OF THE TESTED PARTY WITH THE OPERATING PROFIT OF AN UNCONTROL PARTY ENGAGED IN COMPARABLE TRANSACTIONS. ACCORDINGLY, WE SET ASIDE THE IMPUGNE D ORDER PASSED BY THE LEARNED COMMISSIONER (APPEALS) AND RESTORE T HE MATER TO THE FILE OF THE TPO AND DIRECT HIM TO EXAMINE THE A LP AFTER ADOPTING TNMM AND CARRY OUT FRESH COMPARABILITY ANALYSIS. TH E ASSESSEE WILL PROVIDE ALL THE NECESSARY INFORMATION AND SEARCH AN ALYSIS FOR THE COMPARABLES. THE TPO WILL ALSO PROVIDE DUE AND EFFE CTIVE OPPORTUNITY OF HEARING TO THE ASSESSEE TO REPRESENT ITS CASE. ACCORDINGLY, GROUND NO.1, IS TREATED AS ALLOWED FOR STATISTICAL PURPOSES. 7. THUS, KEEPING IN VIEW THE AFORESAID DECISION OF THE TRIBUNAL IN ASSESSEES OWN CASE CITED SUPRA, WE SET ASIDE THE I MPUGNED ORDER PASSED BY THE LEARNED COMMISSIONER (APPEALS) AND RESTORE T HE MATER TO THE FILE OF THE TPO AND DIRECT HIM TO EXAMINE THE ALP AFTER ADO PTING TNMM AND CARRY OUT FRESH COMPARABILITY ANALYSIS. THE ASSESSEE WILL PROVIDE ALL THE NECESSARY INFORMATION AND SEARCH ANALYSIS FOR THE C OMPARABLES. THE TPO WILL ALSO PROVIDE DUE AND EFFECTIVE OPPORTUNITY OF HEARING TO THE ASSESSEE TO REPRESENT ITS CASE. ACCORDINGLY, GROUND NO.1, IS TREATED AS ALLOWED FOR STATISTICAL PURPOSES. 8. GROUND NO.2, RELATES TO TRANSFER PRICING ADJUSTMENT OF ` 9,80,596, ON ACCOUNT OF COMMISSION PAID TO THE A.E. BY ADJUSTING ARMS LENGTH RATE OF COMMISSION TO 5% INSTEAD OF 12.5% AS PAID BY THE AS SESSEE. 9. BOTH THE PARTIES AGREED BEFORE US THAT THIS ISSUE I S SIMILAR TO THE GROUND RAISED BY THE ASSESSEE IN ITS APPEAL FOR THE ASSESSMENT YEAR 2003 04 AND IN REVENUES APPEAL FOR ASSESSMENT YEAR 2005 06, ITA NO.4189/MUM./2010 AND ITA NO.4444/MUM./2011, ORDER OF EVEN DATE 19 TH DECEMBER 2012, AND THE FINDINGS GIVEN THEREIN WILL APPLY MUTATIS MUTANDIS IN THIS YEAR ALSO. M/S. GARWARE POLYESTER LTD. 6 10. AFTER CAREFULLY CONSIDERING THE RIVAL SUBMISSIONS A ND ON PERUSAL OF THE ORDERS PASSED BY THE TPO AS WELL AS BY THE DRP, WE FIND THAT THE TPO HAS MADE THE ADJUSTMENT OF ` 9,80,596, ON THE GROUND THAT THE ASSESSEE HAS PAID COMMISSION @ 12.5% TO ITS A.E. IN RESPECT OF ORDER PROCURED BY IT WHEREAS THE ASSESSEE HAS PAID EXPORT COMMISSION TO OTHER NONA.E. FOREIGN AGENTS AT AN AVERAGE COMMISSION RATE OF 5%. THEREFORE, HE HELD THAT THE PAYMENT OF COMMISSION @ 5% IS AT ARMS LEN GTH PRICE. THE EXCESS OF 7.5% HAS BEEN DISALLOWED. THIS ISSUE HAS COME UP FOR CONSIDERATION IN ASSESSEES OWN CASE IN ITA NO.4444/MUM./2011, FOR A SSESSMENT YEAR 200506, ORDER OF EVEN DATE 19 TH NOVEMBER 2012, WHEREIN IT HAS BEEN HELD AS UNDER: 20. NOW, COMING TO THE ISSUE OF ADJUSTMENT ON ACCOU NT OF COMMISSION PAID TO THE A.E., THE LEARNED DEPARTMENT AL REPRESENTATIVE HEAVILY RELYING UPON THE FINDINGS OF THE TPO SUBMITTED THAT ONCE THERE IS A SIMILAR NATURE OF TR ANSACTION FOR THE SAME PRODUCT WHICH ARE BEING DEALT WITH BY THE A.ES AND NONA.E. FOREIGN AGENTS, THEN THERE CANNOT BE TWO RATES FOR PAYMENT OF COMMISSION. PAYMENT OF COMMISSION @ 12.5% IS DEFINITELY EXCESSIVE AND THE TPO HAS RIGHTLY TAKEN @ 5% BASED ON RATES OF COMMISSION PAID TO NONA.E. FOREIGN AGENTS. ON THE OTHER HAND, THE LEARNED COUNSEL FOR THE ASSESSEE HAD SUBMITTED THAT THE AGENCY ARRANGEMENTS WITH THE A.ES WERE ENTIRELY DIF FERENT FROM THAT OF NON A.E. FOREIGN AGENTS AND THIS ANALYSIS H AS BEEN DISCUSSED IN DETAIL BY THE LEARNED COMMISSIONER (AP PEALS). HE ALSO POINTED OUT THE RELEVANT OBLIGATIONS WHICH WERE TO BE CARRIED OUT BY THE A.ES WHICH WERE NOT THERE IN CASE OF NONA.E. F OREIGN AGENTS. HE, THUS, STRONGLY RELIED UPON THE FINDINGS AND THE CONCLUSION DRAWN BY THE LEARNED COMMISSIONER (APPEALS). 21. AFTER CAREFULLY CONSIDERING THE RIVAL CONTENTIO NS, WE FIND THAT THE TPO HAS MADE THE ADJUSTMENT ON THE GROUND THAT COMMISSION RATE OF 12.5% PAID TO THE A.ES ARE FAR MORE THAN TH E COMMISSION RATE PAID TO THE NONA.E. FOREIGN AGENTS WHICH WERE RANGING FROM 3% TO 10% AND HAS BENCH MARKED THE SAID TRANSACTION S BY ADOPTING THE RATE OF 5% AND THEREBY HOLDING THAT TH E PAYMENT OF COMMISSION @ 7.5% IS EXCESSIVE. THE LEARNED COMMISS IONER (APPEALS) HAS, IN DETAIL, ANALYSED THE AGENCY ARRAN GEMENT WITH THE A.E. AND ALSO THE AGENCY ARRANGEMENT WITH THE NONA .E. FOREIGN AGENTS. HE HAS EXAMINED THE FUNCTIONAL ANALYSIS IN PARA3.8 WHICH HAS BEEN REPRODUCED ABOVE. FROM THE CONCLUSION AND THE REASONING GIVEN BY THE LEARNED COMMISSIONER (APPEALS) IN PARA S3.8 TO 3.10 BASED ON SUCH FUNCTIONAL ANALYSIS, IT IS SEEN THAT THE SAME HAVE BEEN CORRECTLY ANALYSED AND ARE LIABLE TO BE ACCEPT ED. HE HAS CONCLUDED THAT LOOKING TO THE VARIOUS DIFFERENCES I N THE AGENCY ARRANGEMENT WITH THE A.E. AND NONA.E. FOREIGN AGEN TS, THE ARMS M/S. GARWARE POLYESTER LTD. 7 LENGTH COMMISSION OF THE A.E. SHOULD BE TAKEN @ 10% , AS CONCLUDED BY HIM IN PARA3.11 ABOVE AND THE REASONI NG GIVEN BY HIM IS QUITE APPRECIABLE. OTHERWISE ALSO, IF ONE AN ALYSE THE AGENCY AGREEMENT BETWEEN THE A.ES AND THAT OF NON-A.ES AND CARRIES OUT THE FUNCTIONAL ANALYSIS, THEN IT WOULD BE SEEN THAT THE COST WHICH IS TO BE INCURRED BY THE A.ES AND RISK ASSUMED ARE FAR MORE. RATE OF 10% IS QUITE REASONABLE WHEN IT IS ANALYSED WITH A CASE WHERE THERE IS LESS RISK AND COMMISSION RATES RANGES BETW EEN 3% AND 10%. THEREFORE, THE RATE ADOPTED BY THE COMMISSIONE R (APPEALS) @ 10% IS DEFINITELY AT ARMS LENGTH. 22. HOWEVER, AFTER HAVING COMING TO THE CONCLUSION THAT RATE OF 10% OF THE COMMISSION IS AT ARMS LENGTH, HE HAS GI VEN THE BENEFIT OF ARMS LENGTH RANG OF +/ 5% IN TERMS OF THE PROV ISO TO SECTION 92C. WHILE DOING SO, HE HAS GONE ON THE PREMISE THA T IT IS A SOME KIND OF A STANDARD DEDUCTION. SUCH A CONCLUSION IS WHOLLY ERRONEOUS AS THE STATUTE DOES NOT PROVIDE ANY KIND OF STANDAR D DEDUCTION. THUS, THE BENEFIT OF +/ 5% GIVEN BY THE LEARNED CO MMISSIONER (APPEALS) IS SET ASIDE. INSOFAR AS THE APPLICATION OF RATE OF PAYMENT OF COMMISSION @ 10% TO ITS A.ES IS CONCERNED, THE S AME IS HEREBY UPHELD. THUS, GROUND NO.2, IS PARTLY ALLOWED . 11. KEEPING IN VIEW THE AFORESAID FINDINGS GIVEN IN ASS ESSEES OWN CASE CITED SUPRA, WE HOLD THAT THE ASSESSEES PAYMENT OF COMMISSION @ 10% TO ITS A.E. WOULD BE AT ARMS LENGTH AND ACCORDINGLY, GROUND NO.2, IS PARTLY ALLOWED. 12. GROUND NO.3, RELATES TO DISALLOWANCE OF ` 1,62,56,000, UNDER SECTION 14A OF THE ACT. 13. THE ASSESSING OFFICER NOTED THAT THE ASSESSEE HAS E ARNED DIVIDEND INCOME OF ` 10,92,638, WHICH HAS BEEN CLAIMED AS EXEMPT UNDER SECTION 10(34) OF THE ACT. HOWEVER, THE ASSESSEE HAS NOT DI SALLOWED ANY EXPENDITURE FOR EARNING SUCH EXEMPT INCOME. THE ASS ESSING OFFICER INVOKED THE PROVISIONS OF RULE8D AND CALCULATED TH E DISALLOWANCE AT ` 1,62,56,000, AS PER THE WORKING GIVEN AT PAGE9 OF THE ORDER. 14. THE DRP REJECTED THE ASSESSEES OBJECTION EVEN THOU GH THE ASSESSEE RELIED ON THE JUDGMENT OF HON'BLE JURISDICTIONAL HI GH COURT IN GODREJ & BOYCE MFG. CO. LTD. V/S DCIT, (2010), 328 ITR 081 ( BOM.), AND DIRECTED THE ASSESSING OFFICER TO RECALCULATE THE DISALLOWA NCE IN THE FOLLOWING MANNER: M/S. GARWARE POLYESTER LTD. 8 2. THE DRP HAS CONSIDERED THE LATEST DECISION OF HO N'BLE JURISDICTIONAL HIGH COURT IN THE CASE OF GODREJ & B OYCE V/S DCIT, WHEREIN EVEN THOUGH RULE 8D IS NOT HELD AS APPLICAB LE RETROSPECTIVELY, YET THE HONBLE COURT HAS DECIDED THAT DISALLOWANCE UNDER SECTION 14A HAS TO BE MADE ON REASONABLE BASI S FOR EARLIER YEARS. THE ASSESSEE HAS NOT POINTED OUT ANY ERROR I N APPLICATION OF RULE8D. THE DRP DIRECTS THE A.O. TO RECALCULATE TH E DISALLOWANCE BY FOLLOWING THE PROCEDURE GIVEN BELOW: I) DISALLOW ALL DIRECT EXPENSES RELATING TO EXEMPT INC OME; II) DISALLOW PROPORTIONATE INTEREST EXPENDITURE IN THE RATIO OF AVERAGE VALUE OF ASSETS WHICH MAY YIELD EXEMPT INCO ME AND TOTAL ASSETS OF THE ASSESSEE; III) THE A.O. SHALL DISALLOW REASONABLE INDIRECT EXPENDI TURE ON ACCOUNT OF MANAGING THE INVESTMENTS IN ASSETS, WHIC H WILL RESULT INTO EXEMPT INCOME AND SUCH PERCENTAGE MAY B E 0.5% OF AVERAGE VALUE OF ASSETS YIELDING EXEMPT INC OME. 15. LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT DES PITE REFERRING TO THE JUDGMENT OF HON'BLE JURISDICTIONAL HIGH COURT I N GODREJ & BOYCE MFG. CO. LTD. (SUPRA), THE DRP HAS DIRECTED THE ASSESSIN G OFFICER TO WORK OUT THE DISALLOWANCE WHICH IS ALMOST IN ACCORDANCE WITH RULE8D. HE SUBMITTED THAT IN THE EARLIER YEARS, THE ASSESSING OFFICER HAS NOT CONSIDERED THE INVESTMENT MADE IN THE SUBSIDIARY GA RWARE CHEMICALS LTD. IN HIS DISALLOWANCE. HE REFERRED TO PAGE1 OF THE P APER BOOK GIVING THE BASIS FOR DISALLOWANCE MADE BY THE ASSESSING OFFICE R IN VARIOUS ASSESSMENT YEARS. ACCORDINGLY, HE SUBMITTED THAT TH E APPROACH OF THE ASSESSING OFFICER SHOULD BE CONSISTENT AND MOREOVER SUCH A HIGH PITCH DISALLOWANCE CANNOT BE MADE UNDER SECTION 14A ON A DIVIDEND INCOME OF ` 10,92,638. 16. LEARNED DEPARTMENTAL REPRESENTATIVE RELIED UPON THE DIRECTION THE DIRECTIONS OF THE DRP. 17. WE HAVE CAREFULLY CONSIDERED THE RIVAL CONTENTIONS OF THE PARTIES, PERUSED THE ORDERS OF THE AUTHORITIES BELOW AND THE MATERIAL PLACED ON RECORD. IN THE PRESENT CASE, THE ASSESSING OFFICER HAS APPLIED RULE8D, WHICH, IN A MANNER, HAS ALSO BEEN CONFIRMED BY THE DRP, CANNOT HELD TO BE TENABLE IN LAW IN VIEW OF THE JUDGMENT OF THE HO N'BLE JURISDICTIONAL HIGH M/S. GARWARE POLYESTER LTD. 9 COURT IN GODREJ & BOYCE MFG. CO. LTD. (SUPRA), WHER EIN IT HAS BEEN CATEGORICALLY HELD THAT RULE8D IS APPLICABLE ONLY FROM ASSESSMENT YEAR 200809 AND NOT FOR THE EARLIER YEARS. ADMITTEDLY, IN THIS YEAR, I.E., 2006 07, RULE8D CANNOT BE HELD TO BE APPLICABLE. MOREOV ER, AS POINTED OUT BY THE LEARNED COUNSEL FOR THE ASSESSEE THAT THE ASSES SING OFFICER HAS BEEN FOLLOWING THE CONSISTENT METHOD FOR DISALLOWANCE FO R NOT CONSIDERING THE INVESTMENT MADE IN THE SUBSIDIARY GARWARE CHEMICALS LTD., WHILE COMPUTING THE DISALLOWANCE. IN THIS YEAR ALSO, NO D EPARTURE SHOULD BE MADE ON SUCH AN APPROACH. WE SET ASIDE THE IMPUGNED ORDER PASSED BY THE LEARNED COMMISSIONER (APPEALS) AND RESTORE THE MATTER BACK TO THE FILE OF THE ASSESSING OFFICER AND DIRECT HIM TO EXA MINE THE NATURE OF INVESTMENT AND THE EXPENDITURE ATTRIBUTABLE TO SUCH AN INVESTMENT AND WORK OUT SOME REASONABLE BASIS WITHOUT RESORTING TO RULE8D IN ANY MANNER. THE ASSESSEE WILL ALSO PROVIDE NECESSARY DE TAILS IN THIS REGARD TO THE ASSESSING OFFICER. GROUND NO.3, IS THUS TREATED AS PARTLY ALLOWED FOR STATISTICAL PURPOSES. 18. GROUND NO.4, RELATES TO DISALLOWANCE OF ` 28,685, AS UNEXPLAINED RECEIPTS. 19. THE ASSESSING OFFICER, FROM THE RECONCILIATION OF I TS DETAILS, FOUND THAT A SUM OF ` 28,685, HAS BEEN RECEIVED BY THE ASSESSEE FROM EAS T WEST FREIGHT CARRIERS LTD., BUT THE SAME HAS NOT BEEN CR EDITED IN THE PROFIT & LOSS ACCOUNT. IT HAS BEEN OBSERVED BY HIM THAT THE ASSESSEE COULD NOT GIVE AN;Y REASON FOR NOT INCLUDING THE SAME IN THE TOTAL INCOME AND WAS UNABLE TO EXPLAIN THE TRANSACTION AND, ACCORDINGLY, THE SAME HAS BEEN ADDED. 20. LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED BEFORE U S THAT THIS IS FACTUALLY INCORRECT AND THIS FINDING OF THE ASSESSI NG OFFICER HAS BEEN CHALLENGED SPECIFICALLY IN THE GROUNDS OF APPEAL. T HE ASSESSING OFFICER HAS NOT GIVEN PROPER OPPORTUNITY AFTER THE DIRECTIONS O F THE DRP WHICH IS EVIDENT FROM THE FACT THAT THE DRPS ORDER WAS RECE IVED BY THE ASSESSING OFFICER ON 29 TH SEPTEMBER 2010 AND THE ORDER HAS BEEN PASSED BY TH E M/S. GARWARE POLYESTER LTD. 10 ASSESSING OFFICER WITHIN A SHORT PERIOD ON 8 TH OCTOBER 2010. HENCE, THERE WAS NO SUFFICIENT TIME TO PROVIDE THE NECESSARY DET AILS AND RECONCILIATION. HE, THEREFORE, REQUESTED THAT THE MATTER SHOULD GO BACK TO THE ASSESSING OFFICER TO PROVIDE PROPER OPPORTUNITY TO THE ASSESS EE TO PLACE THE RELEVANT DETAILS. 21. THE LEARNED DEPARTMENTAL REPRESENTATIVE, ON THE OTH ER HAND, DID NOT OBJECT TO THE SUBMISSIONS OF THE LEARNED COUNSE L FOR THE ASSESSEE. 22. WE HAVE CAREFULLY CONSIDERED THE RIVAL CONTENTIONS OF THE PARTIES, PERUSED THE ORDERS OF THE AUTHORITIES BELOW AND THE MATERIAL PLACED ON RECORD. IN VIEW OF THE AFORESAID SUBMISSIONS OF BOT H THE PARTIES, THAT NO SUFFICIENT OPPORTUNITY WAS GIVEN BY THE ASSESSING O FFICER ON THIS ISSUE, WE SET ASIDE THE IMPUGNED ORDER PASSED BY THE LEARNED COMMISSIONER (APPEALS) AND RESTORE THE MATTER BACK TO THE FILE O F THE ASSESSING OFFICER AND DIRECT HIM TO PASS ORDER AFRESH AFTER GIVING DU E AND EFFECTIVE OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. THE ASS ESSEE IS DIRECTED TO FILE ALL THE DETAILS WHICH ARE NECESSARY FOR THE ADJUDIC ATION OF THIS ISSUE. THUS, THIS GROUND IS ALLOWED FOR STATISTICAL PURPOSES. 23. 1 #6 4! 2 72 89: ' '$ !# ; 2 4# <= > 23. IN THE RESULT, ASSESSEES APPEAL IS PARTLY ALLO WED FOR STATISTICAL PURPOSE. $ 2 + ? @)6 19 TH DECEMBER 2012 2 A > ORDER PRONOUNCED IN THE OPEN COURT ON 19 TH DECEMBER 2012 SD/- . .. . B. RAMAKOTAIAH ACCOUNTANT MEMBER SD/- '# '# '# '# $% $% $% $% & & & & AMIT SHUKLA JUDICIAL MEMBER MUMBAI, @) @) @) @) DATED: 19 TH DECEMBER 2012 M/S. GARWARE POLYESTER LTD. 11 $ 2 .&#'B CB+# / COPY OF THE ORDER FORWARDED TO : (1) &) *1# / THE ASSESSEE; (2) 4! / THE REVENUE; (3) D () / THE CIT(A); (4) D / THE CIT, MUMBAI CITY CONCERNED; (5) B!GA .&#&) , , / THE DR, ITAT, MUMBAI; (6) AH* I / GUARD FILE. /B# .&# / TRUE COPY $) / BY ORDER . 4. JK / PRADEEP J. CHOWDHURY !1L &)4 J! / SR. PRIVATE SECRETARY 8 / < 4 / (DY./ASSTT. REGISTRAR) , / ITAT, MUMBAI