BHANSALI & CO, MUMBAI V. ACIT RG 16(3), MUMBAI

ITA 825/MUM/2014

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 84395 (ITAT-MUMBAI)
• Duration Of Justice: 10 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 05-12-2014
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: K
• Next Hearing Date: 02-12-2014
• Assessment Year: 2009-2010
• Appeal Filed On: 05-02-2014
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: K C P PATNAYAK
• Assessee Lawyers: APURVA R SHAH
• Keywords: Transfer pricing; International transaction; Rule of consistency; Wholly owned subsidiary
• Section: 143(3); 80G

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES K, MUMBAI , . , . . , . , BEFORE SHRI VIJAY PAL RAO, JM & SHRI N K BILLAIYA, AM ./ ITA NO.825/MUM/2014 ! '! / ASSESSMENT YEAR 2009-2010 M/S. BHANSALI & CO. EE-7010 BHARAT DIAMOND BOURSE, BANDRA KURLA COMPLEX, BANDRA (E), MUMBAI- 400 051 PAN AACFB8643C VS. THE ACIT 16(3), MUMBAI. ( #$ /APPELLANT) ( %&#$ /RESPONDENT) APPELLANT BY : SHRI APURVA R SHAH RESPONDENT BY : SHRI K C P PATNAYAK ' ()* / DATE OF HEARING :02.12.2014. +,' ' ()* / DATE OF PRONOUNCEMENT : 05.12.2014 -. -. -. -. / O R D E R PER N K BILLAIYA, AM: THIS APPEAL BY THE ASSESSEE IS PREFERRED AGAINST T HE ORDER DATED 20.01.2014 MADE U/S. 143(3) R.W.S 144C OF THE ACT FOR A.Y. 200 9-10. 2. THE ASSESSEE IS A PARTNERSHIP FIRM ENGAGED IN TH E BUSINESS OF MANUFACTURE OF CUT AND POLISHED DIAMONDS AND IN SALE THEREOF INCLU DING EXPORTS. THE RETURN FOR THE YEAR WAS FILED ON 29.09.2009 DECLARING TOTAL INCOME OF RS.1,31,92,121/-. THE RETURN WAS SELECTED FOR SCRUTINY ASSESSMENT AND ACCORDINGL Y STATUTORY NOTICES WERE ISSUED AND SERVED UPON THE ASSESSEE. ITA NO.825/MUM/2014 BHANSALI & CO. 2 3. DURING THE COURSE OF SCRUTINY ASSESSMENT PROCEED INGS, AS PER THE AUDIT REPORT IN FORM NO.3CEB FILED BY THE ASSESSEE, THE A O NOTICED THAT THE ASSESSEE HAS UNDERTAKEN INTERNATIONAL TRANSACTIONS WITH ITS ASSO CIATE ENTERPRISES EXCEEDING RS.15 CRORES. THE CASE WAS REFERRED TO THE TRANSFER PRICI NG OFFICER (TPO) U/S. 92CA(1) OF THE ACT FOR DETERMINATION OF THE ARMS LENGTH PRICE OF THE INTERNATIONAL TRANSACTIONS. THE INTERNATIONAL TRANSACTIONS OF THE ASSESSEE ARE AS UNDER: SR. NO NAME OF THE ASSOCIATED ENTERPRISES NATURE OF TRANSACTION AMOUNT 1 PRISM DIAMONDS INC. USA EXPORT OF CUT & POLISHED DIAMONDS 4,61,70,305 2 PRISM DIAMONDS INC. USA PURCHASE OF CUT & POLISHED DIAMONDS 2,04,13,140 3 BHANSALI & CO. (HK) LTD. EXPORT OF CUT & POLISHED D IAMONDS 63,97,78,032 4 BHANSALI & CO. (HK) LTD. LOAN (LOAN OUTSTANDING FRO M 01.04.2005, LOAN AMOUNT RS.53.47 LAKHS/- @7.25% AND ACCRUED INTEREST THEREON AS IN THE EARLIER YEARS, REPAID IN FULL IN FEBRUARY 2009 2,50,000 THE TPO NOTICED THAT THE ASSESSEE HAS GIVEN LOAN TO ITS ASSOCIATE ENTERPRISES AMOUNTING TO RS.53.47 LACS. IT WAS ALSO OBSERVED T HAT THE ASSOCIATE ENTERPRISE HAS REPAID THE LOAN ON 27.02.2009 IN FULL. THE TPO FUR THER OBSERVED THAT THE ASSESSEE HAS OFFERED RS.2.50 LACS TOWARDS INTEREST INCOME. T HE DETAILS WERE ALSO FILED BY THE ASSESSEE IN RESPECT OF INTEREST RECEIVABLE ON THE L OANS ADVANCED TO THE ASSOCIATE ENTERPRISE. IT WAS EXPLAINED BY THE ASSESSEE THAT O NE YEAR LIBOR WAS 2.12% THE INTEREST RATE FOR THE LOAN GIVEN BY THE ASSESSEE CO MES TO 4.12%, WHICH IS EQUIVALENT TO RS.2,27,461. AS THE ASSESSEE HAS OFFERED RS.2,5 0,000 AS INTEREST INCOME, IT WAS CONTENDED THAT INTEREST RECEIVED IS AT ARMS LENGTH . THE SUBMISSIONS OF THE ASSESSEE WERE EXAMINED BY THE TPO. IT WAS FOUND TH AT THE ASSESSEE HAS BENCHMARKED LOAN TRANSACTIONS AT LIBOR PLUS 200 BAS IS POINTS. THE TPO WAS OF THE OPINION THAT HERE IS NO REASON ON THE BASIS OF WHIC H 200 BASIS POINTS HAVE BEEN APPLIED. THE TPO PROPOSED TO APPLY ARMS LENGTH IN TEREST @12%. THE ASSESSEE CONTENDED THAT THE EFFECTIVE RATE WORKED OUT BY THE ASSESSEE IS 7.81%. IT WAS FURTHER EXPLAINED THAT THE ASSESSEE HAS BEEN BENCHM ARKING THE SAME RATE SINCE A.Y. 2005-06. THE CONTENTION OF THE ASSESSEE DID N OT FIND FAVOUR WITH THE TPO, ITA NO.825/MUM/2014 BHANSALI & CO. 3 WHO PROCEEDED BY APPLYING LIBOR PLUS 500 BASIS POIN TS AND COMPUTED THE INTEREST AT RS.3,93,088/-. SINCE THE ASSESSEE HAS OFFERED R S.2,50,000 THE EFFECTIVE ADJUSTMENT WAS DETERMINED AT RS.1,43,088/- DRAFT A SSESSMENT ORDER WAS MADE BY THE AO VIDE ORDER DATED 28.03.2013. THE ASSESSEE O BJECTED THE SAID ADJUSTMENT BEFORE THE DISPUTE RESOLUTION PANEL (DRP). IT WAS CLAIMED THAT THE OUTSTANDING LOAN OF RS.53.47 LACS WAS GIVEN TO THE ASSOCIATE EN TERPRISE IN PAST AND THE ENTIRE LOAN HAS BEEN REPAID BACK ON 27.02.2009. IT WAS FU RTHER BROUGHT TO THE NOTICE OF THE DRP THAT THE INTEREST RATE ADOPTED BY THE ASSES SEE HAS BEEN APPLIED BY THE ASSESSEE FOR THE PAST FOUR YEARS AND THE ALP HAS BE EN ACCEPTED BY THE TPO. THE DRP DID NOT AGREE WITH THE LIBOR PLUS 500 BASIS POI NTS APPROACH ADOPTED BY THE TPO. ACCORDING TO THE DRP THE MONEY WAS LOAN FROM INDIA. THEREFORE, THE INTEREST CHARGED FROM ITS ASSOCIATE ENTERPRISE SHOULD BE EQU IVALENT TO THE DOMESTIC COST OF BORROWING. THE DRP DIRECTED THE TPO/AO TO CONSIDER THE ALP @10.81%. AGGRIEVED BY THIS THE ASSESSEE IS BEFORE US QUA GRO UND NO.1. 4. THE COUNSEL FOR THE ASSESSEE STATED THAT THE LOA N WAS GIVEN TO THE WHOLLY OWNED SUBSIDIARY COMPANY IN THE YEAR 2005, WHICH WA S FULLY REPAID ON 27.02.2009. THE ASSESSEE HAD ADOPTED THE RATE OF INTEREST, WHIC H WAS LIBOR PLUS 200 BASIS POINTS. THE DRP HAS TAKEN THE AVERAGE COST OF DOME STIC BORROWING PLUS 300 BASIS POINTS I.E. 10.81%, WHICH IS AGAINST THE FACTS OF T HE CASE. THE COUNSEL FURTHER STATED THAT SAME RATE OF INTEREST HAS BEEN ACCEPTED AT ARMS LENGTH IN TRANSFER PRICING FOR A.YS. 2005-06 TO 2008-09. THEREFORE, D EVIATION FROM THE EARLIER ASSESSMENT YEARS BREACHES RULE OF CONSISTENCY. THE DR STRONGLY SUPPORTED THE FINDINGS OF THE LOWER AUTHORITIES. 5. WE HAVE CAREFULLY PERUSED THE ORDERS OF THE AUTH ORITIES BELOW. IT IS AN ADMITTED FACT THAT THE LOAN WAS GIVEN IN THE YEAR 2 005. IT IS ALSO UNDISPUTED FACT THAT INTEREST RATE CHARGED AS LIBOR PLUS 200 BASIS POINTS HAVE BEEN ACCEPTED IN COMPLETED ASSESSMENTS FROM AYS 2005-06 TO 2008-09. THUS, BY TAKING A DIFFERENT VIEW ON THE SAME SET OF FACTS VIOLATES THE RULE OF CONSISTENCY. SECONDLY, THE DRP ERRED IN CONSIDERING THE LOAN AS LOAN FROM INDIA. THE FACT OF THE MATTER IS THAT IT WAS A FOREIGN CURRENCY LOAN WHICH WAS GIVEN ABROAD. THEREFORE THE MOST APPROPRIATE METHOD IS TAKING THE LIBOR AS CORRECT B ENCHMARK. A SIMILAR VIEW HAS ITA NO.825/MUM/2014 BHANSALI & CO. 4 BEEN TAKEN BY THE TRIBUNAL IN THE CASE OF HINDUJA G LOBAL SOLUTION LTD. 145 ITD 361. CONSIDERING THE PAST HISTORY AND THE DECISION OF TH E TRIBUNAL (SUPRA), WE FIND THAT THE BENCHMARKING DONE BY THE ASSESSEE IS CORRECT AN D THE AO IS DIRECTED TO DELETE THE ADDITION. GROUND NO.1 WITH ITS SUB GROUND IS A LLOWED. 6. THE SECOND GRIEVANCE OF THE ASSESSEE RELATES TO THE DISALLOWANCE OF RS.1,48,61,119 U/S. 40A(2)(B) OF THE ACT. AT THE V ERY OUTSET THE COUNSEL FOR THE ASSESSEE BROUGHT TO OUR NOTICE THE DECISION OF THE TRIBUNAL IN THE ASSESSEES OWN CASE FOR A.Y. 2005-06. IT IS THE SAY OF THE COUNSE L THAT ON THE SAME SET OF FACTS, THE TRIBUNAL HAS SET ASIDE THE ORDER OF THE CIT(A) AND RESTORED THE MATTER TO THE FILES OF THE AO. THE DR FAIRLY CONCEDED TO THIS. 7. WE HAVE CAREFULLY PERUSED THE GRIEVANCE OF THE A SSESSEE VIZ-A-VIZ THE ORDER OF THE TRIBUNAL IN ITA NO. 2282/MUM/2010 FOR A.Y. 2 005-06. WE FIND THAT A SIMILAR ISSUE HAS BEEN CONSIDERED BY THE TRIBUNAL AT PARA 5 OF ITS ORDER AND HELD AS UNDER:- 12. IN OUR OPINION, NEITHER THE ASSESSEE HAS PROV IDED ANY COMPARABLE RATES TO THE REVENUE AUTHORITIES NOR THE REVENUE AUTHORITIES HAVE MADE ANY ATTEMPT EITHER BY ASKING THE ASSESSEE TO PROVIDE FOR THE COMPARABLE NOR THEY SUO MOTO COLLEC TED ANY DATA FROM THE MARKET. WHAT THE REVENUE AUTHORITIES HAVE DONE IS THAT THEY HAVE RELIED ON THE INTERNAL COMPARABLE ONLY TO ARRIVE AT A FIGURE OF ESTIMATED CHARGES PER CARAT. IN FACT, THE AO SHOULD HAVE COLLECTED INDEPENDENT DATA OR HAVE ASKED THE ASSESSEE TO PROV IDE COMPARABLE PERIODIC RATES PREVAILING IN THE MARKET AT DEESA TO SET THE BENCH MARK. THIS EXERCISE HAS NOT BEEN DONE BY THE AO OR BY THE CIT(A), WHICH ACCORDING TO US, THE REVENUE AUTHORITIES SHOULD HAV E DONE TO ARRIVE AT SOME DEFINITE ESTIMATE. 13. IN THESE CIRCUMSTANCES, WE ARE OF THE OPINION THAT IN THE INTEREST OF JUSTICE TO BOTH THE SIDES, THE AO MUST MAKE ENQUIRIES AND EXAMINE THE COMPARABLE RATES FROM THE THIRD PARTIES AT DEESA AND THEN BENCHMARK THE AVERAGE JOB WORK RATE FOR THE FI NANCIAL YEAR IN QUESTION AND COMPUTE THE JOB WORK CHARGES. 14. WE, THEREFORE, SET ASIDE THE ORDER OF THE CIT( A) ON THE ISSUE OF ADDITION OF RS. 43,97,624/- WITH THE ABOVE DIRECTIO N TO THE AO, WHO SHALL AFFORD ADEQUATE AND REASONABLE OPPORTUNITY TO THE ASSESSEE TO PRESENT ITS CASE. ITA NO.825/MUM/2014 BHANSALI & CO. 5 8. AS NO DISTINGUISHING FACT HAS BEEN BROUGHT TO OU R NOTICE, RESPECTFULLY, FOLLOWING THE DECISION OF THE CO-ORDINATE BENCH, TH E MATTER IS RESTORED TO THE FILE OF THE AO TO BE DECIDED AFRESH IN THE LIGHT OF THE DIR ECTION GIVEN BY THE TRIBUNAL IN A.Y. 2005-06 (SUPRA). GROUND NO.2 IS TREATED AS ALLOWED FOR STATISTICAL PURPOSE. 9. GROUND NO.3 RELATES TO DISALLOWANCE OF DEDUCTION FOR DONATIONS MADE U/S. 80G OF THE ACT. THE COUNSEL FOR THE ASSESSEE STATE D THAT FOR SOME REASON THE DONATION RECEIPTS COULD NOT BE PRODUCED BEFORE THE AO. FURTHER, IF ONE MORE OPPORTUNITY IS GIVEN, NECESSARY DETAILS WILL BE SUB MITTED BEFORE THE AO. AS WE HAVE RESTORED THE MATTER RELATING TO GROUND NO.2 TO THE FILES OF THE AO, IN THE INTEREST OF JUSTICE AND FAIR PLAY, WE DIRECT THE AO TO CONSIDER THE DOCUMENTARY EVIDENCE SUBMITTED BY THE ASSESSEE FOR THE CLAIM OF DEDUCTIO N ON ACCOUNT OF DONATION U/S. 80G OF THE ACT. THE ASSESSEE IS DIRECTED TO SUBMIT NECESSARY DETAILS IN SUPPORT OF ITS CLAIM. GROUND NO.3 IS ALLOWED FOR STATISTICAL PURPOSES. 10. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS ALLOWED IN PART FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON THIS 5 TH DAY OF DECEMBER, 2014. SD/- SD/- (VIJAY PAL RAO) (N K BILLAIYA) JUDICIAL MEMBER ACCOUNTANT MEM BER MUMBAI; /- DATED : 5 TH DECEMBER, 2014. SA -. ' %( 0'( / COPY OF THE ORDER FORWARDED TO : 1. #$ /THE APPELLANT. 2. %&#$ / THE RESPONDENT. 3. 1 ( ) / THE CIT(A), MUMBAI. 4. 1 / CIT 5. 23 %( , , / DR, K BENCH, ITAT, MUMBAI -. / BY ORDER, &( %( //TRUE COPY// / 4 (DY./ASSTT. REGISTRAR) , / ITAT, MUMBAI