MURPHY LIGHTING, Jaipur V. ITO, Jaipur

ITA 878/JPR/2016

• Counselvise Citation: [2017] 128 COUNSELVISE.COM (IT) 9712 (ITAT-JAIPUR)
• Duration Of Justice: 4 month(s) 24 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 27-02-2017
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: A
• Assessment Year: 2012-2013
• Appeal Filed On: 03-10-2016
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: POONAM RAI; R A VERMA CIT DR LQ
• Keywords: Business income

Judgement Text

VK;DJ VIHYH; VF/KDJ.K] T;IQJ U;K;IHB] T;IQJ IN THE INCOME TAX APPELLATE TRIBUNAL, JAIPUR BENCHES (SMC), JAIPUR JH HKKXPUN] YS[KK LNL; DS LE{K BEFORE: SHRI BHAGCHAND, ACCOUNTANT MEMBER VK;DJ VIHY LA-@ ITA NO. 878/JP/2016 FU/KZKJ.K O'K Z@ ASSESSMENT YEAR : 2012-13 M/S. MURPHY LIGHTING F-261, ROAD NO. 13, VKI AREA, JAIPUR CUKE VS. THE ITO WARD- 4(3), JAIPUR LFKK;H YS[KK LA-@THVKBZVKJ LA-@ PAN/GIR NO .: AAPFM 6384 A VIHYKFKHZ@ APPELLANT IZR;FKHZ@ RESPONDENT FU/KZKFJRH DH VKSJ LS@ ASSESSEE BY: SHRI P.C. PARWAL , CA JKTLO DH VKSJ LS@ REVENUE BY: SMT. POONAM RAI, DCIT- DR & SHRI R.A. VERMA, ADDL. CIT DR LQUOKBZ DH RKJH[K@ DATE OF HEARING : 23/02/2017 ?KKS'K .KK DH RKJH[K@ DATE OF PRONOUNCEMENT : 27 /02/2017 VKNS'K@ ORDER PER BHAGCHAND, AM THE ASSESSEE HAS FILED AN APPEAL AGAINST THE ORDE R OF THE LD. CIT(A)-2 , JAIPUR DATED 25-08-2016 FOR THE ASSES SMENT YEAR 2012-13 RAISING FOLLOWING GROUNDS OF APPEAL. 1. THE LD. CIT(A) HAS ERRED ON FACTS AND IN LAW IN CON FIRMING THE ACTION OF AO IN HOLDING THAT PROVISIONS OF SECTION 80-IA(10) ARE APPLICABLE WITHOUT PROPERLY CONSIDERING AND ANALYZI NG THE VARIOUS EVIDENCES FILED BY THE ASSESSEE 1.1 THE LD. CIT(A) HAS ERRED ON FACTS AND IN LAW IN CONFIRMING RESTRICTING THE CLAIM OF DEDUCTION U/S 80IC BY HOLD ING THAT PROFITS OF THE ELIGIBLE BUSINESS SHOULD BE DETERMINED BY CONSI DERING NET PROFIT RATE OF 30% AS AGAINST 43.50% DECLARED BY ASSESSEE AND 7.12% APPLIED ITA NO.878/JP/2016 M/S. MURPHY LIGHTING S ITO, WARD- 4(3), JAIPUR 2 BY AO AND THEREBY ALLOWING THE DEDUCTION AT RS.25,6 5,237/- AS AGAINST RS.36,15,771/- CLAIMED BY THE ASSESSEE. 2.1 APROPOS GROUND NO. 1 AND 2 OF THE ASSESSEE, THE FACTS AS EMERGES FROM THE ORDER OF THE LD. CIT(A) IS AS UNDER:- I HAVE PERUSED THE FACTS OF THE CASE, THE ASSESSMENT ORDER AND THE SUBMISSIONS OF THE APPELLA NT. THE FACTS OF THE CASE ARE THAT THE ASSESSEE DURING THE YEAR WAS IN TRADING AND MANUFACTURING OF ELECTRICAL BULB AND CF L AND THEIR COMPONENTS. ON A TURNOVER OF RS. 85,85,52,78 9/- A GROSS PROFIT OF 47.33% WAS DECLARED AGAINST 45.03% DECLARED IN THE PREVIOUS YEAR. DURING THE YEAR, THE ASSESSEE CLAIMED A DEDUCTION OF RS. 36,15,771/- U/S 80IC OF THE I.T. A CT, 1961. THE AO EXAMINED THE BOOKS OF ACCOUNTS, AUDIT REPORT S ALONGWITH PROFIT AND LOSS ACCOUNT AND COPIS OF BOO KS OF ACCOUNT OF THE ASSESSEE FIRM AND ITS SISTER CONCERN , M/S. FAIRDEALS WHICH DEALS IN THE SAME BUSINESS I.E. TRA DING AND MANUFACTURING OF ELECTRIC BULBS, CFL, LED LIGHTS A ND OTHER COMPONENTS. IMPORTANTLY, IT HAS NOTICED THAT DURING THE YEAR UNDER CONSIDERATION, THE ASSESSEE FIRM PURCHASED AL MOST 65% OF RAW MATERIAL FROM ITS SISTER CONCERN AND ALL FIN ISHED GOODS WERE SOLD TO THE SISTER CONCERN. THE SISTER CONCERN HAS SHOWN NET PROFIT OF 0.094% ON A TURNOVER OF RS. 4.4 CROR ES WHILE ASSESSEE COMPANY HAS SHOWN 43.50% ON A TURNOVER OF RS. 85 LAKHS. CONSIDERING THE ABOVE FACTS AND EXAMINATI ON OF ACCOUNTS OF TWO CONCERNS, THE ASSESSING OFFICER PRO CEEDED TO APPLY PROVISIONS OF SECTION 80IA OF THE I.T. ACT , 1961 AND AFFORDED AN OPPORTUNITY TO THE ASSESSEE TO EXPLAIN THE SAME. THE ASSESSEES SUBMISSION AND ASSESSING OFFICERS CONCLUSIONS ARE REPRODUCED AT PAGES 2 TO 5 OF THIS ORDER. THE ASSESSING OFFICER, THUS APPLIED THE PROVISIONS OF S ECTION 80IA(10) AND ESTIMATED THE NET PROFIT OF THE ASSESS EE ON THE BASIS OF CONSOLIDATED NET PROFIT AND CONSOLIDATED T URNOVER OF BOTH FIRMS AND ALLOWED THE DEDUCTION U/S 80IC ON RS . 6,08,816/- AND DISALLOWED THE BALANCE. THE ASSESSING OFFICER DURING THE EXAMINATION OF DETAILS FURNISHED NOTICED THAT ASSESSEE FIRM AND SI STER ITA NO.878/JP/2016 M/S. MURPHY LIGHTING S ITO, WARD- 4(3), JAIPUR 3 CONCERN DEAL IN THE SAME NATURE OF BUSINESS I.E. TR ADING AND MANUFACTURING OF ELECTRICAL BULBS, CFL, LED LIGHTS ETC. FURTHER THE ASSESSEE FIRM HAD PURCHASED ALMOST 65% OF RAW MATERIAL FROM THE SISTER CONCERNS AND ALL THE FINIS HED GOODS WERE SOLD TO THE SISTER CONCERN. THE AUTHORISED REP RESENTATIVE HAS TRIED TO EXPLAIN THAT IN THE PREVIOUS YEARS PRO FIT PERCENTAGE WAS BETTER AND THAT TRANSACTIONS BETWEEN THE TWO CONCERNS IS AT THE SIMILAR RATE AS WITH OTHER CONCE RNS HENCE THE BUSINESS IS NOT ARRANGE SO AS TO RESULT IN ARIS ING OF MORE THAN ORDINARY PROFITS TO THE ELIGIBLE BUSINESS AND HENCE, THE PROVISIONS OF SECTION 80IA(10) WOULD NOT BE APPLICA BLE. I HAVE EXAMINED THE DETAILS FURNISHED BY THE ASSESS EE. THE FACT THAT BOTH UNITS DEAL IN SIMILAR BUSINESS E VEN THOUGH THE PRODUCTION, AS PER AUTHORIZED REPRESENTATIVE, I N THE ASSESSEE COMPANY IS ONLY OF LED BULBS WHICH IS AN INNOVATIVE PRODUCT, IS A FACT. FURTHER, THERE IS RE GULAR PURCHASE AND SALE OF COMPONENTS AND FINISHED PRODUC TS BETWEEN THE TWO CONCERNS. DURING THE YEAR 60.25% OF RAW MATERIAL PURCHASE ARE FROM SISTER CONCERN AND ENTIR E SALES WHICH INCLUDE SEMI FINISHED GOODS, ARE TO THE SISTE R CONCERN. IT WAS SUBMITTED THAT THE SISTER CONCERN DEALS IN T RADITIONAL PRODUCTS, PRODUCTS ARE SUBJECT TO CST AND EXCISE DU TY OF ABOUT 7%, ADMINISTRATION AND OTHER EXPENDITURES ARE MORE, THERE IS AN INTEREST BURDEN WHICH IS SUBSTANTIAL PA RT OF THE EXPENDITURE AND THE TURNOVER IS RS. 4.4 CRORES AS COMPARED TO RS.85,50,789/- IN THE ASSESSEE COMPANY. I HAVE A LSO PERUSED THE DETAILS SUBMITTED TO PROVE THAT SALES A ND PURCHASE HAVE BEEN MADE ON SIMILAR RATES TO THE SIS TER CONCERN AND THE OTHER CONCERNS. IT IS SEEN THAT THE SE DETAILS DO NOT PRESENT COMPARABLE CASES WHERE PRICES ARE CO MPARED THE QUANTITIES ARE VASTLY DIFFERENT FOR E.G. 8100 N UMBER OF PRINTED CIRCUIT BOARDS ARE BEING COMPARED WITH THE TRANSACTION FOR RS.52,560/- BOARDS. SIMILARLY, THE MONTHS OF TRANSACTION ARE DIFFERENT AND IN SUCH SITUATION IT CANNOT BE GIVEN MUCH CREDENCE. THE TWO CONCERNS DEAL IN SIMIL AR PRODUCTS, THE PARTNERS AND MANAGEMENT IN BOTH THE C ONCERNS ARE SAME, THERE ARE TRANSACTIONS OF SALE AND PURCHA SE AND IN FACT IN THE YEAR UNDER CONSIDERATION ENTIRE SALE IS TO THE SISTER CONCERN AS IT WAS SUBMITTED THAT ASSESSEE COMPANY S TOPPED ITA NO.878/JP/2016 M/S. MURPHY LIGHTING S ITO, WARD- 4(3), JAIPUR 4 PRODUCTION AFTER THIS YEAR. THE SALE PRICE IS ALSO NOT COMPARABLE AS GOODS SOLD ARE AT VARIOUS STAGES OF C OMPLETION AND IT IS NOT POSSIBLE TO VERIFY THE CORRECTION OF THE VALUATION. THE WIDE DIFFERENCE IN NET PROFIT AT 43.50% AND 0.0 95%DOES NOT GET EXPLAINED BY FACTORS POINTED OUT BY THE AUT HORIZED REPRESENTATIVE AND DISCUSSED BY ME ABOVE. IN VIEW OF THE SAME, PROVISIONS OF SECTION 80IA(10) ARE APPLICABLE . NOW COMING TO THE PERCENTAGE OF PROFITS WHICH CAN REASO NABLY BE SAID TO BE DERIVED FROM THE ELIGIBLE BUSINESS, AFTE R TAKING INTO CONSIDERATION FACTORS DISCUSSED EARLIER, WILL BE 30% INSTEAD OF 43.50% RETURNED BY THE ASSESSEE. THE AO TO MODIFY THE DEDUCTION U/S 80IA ACCORDINGLY. CONSEQUENTLY, THE LD. CIT(A) HELD THAT PROVISIONS OF SECTION 80IA(10) ARE APPLICABLE ON THE ASSESSEE BUT THE PERCENTAGE O F PROFITS WILL BE 30% INSTEAD OF 43.50% RETURNED BY THE ASSESSEE AND ACCO RDINGLY THE AO WILL MODIFY THE DEDUCTION U/S 80IA OF THE ACT. 2.2 DURING THE COURSE OF HEARING, THE LD. AR OF THE ASSESSEE PRAYED TO ACCEPT THE NET PROFIT RATE DECLARED BY THE ASSESSEE AND ALLOW DEDUCTION U/S 80IA ACCORDINGLY. THE LD. AR OF THE ASSESSEE FILED THE FOLLOWING WRITTEN SUBMISSION WHICH HAS BEEN TAKEN INTO CONSIDERATION. SUBMISSION:- 1. THE PROVISION OF SECTION 80IC(7) READ WITH SEC TION 80IA(10) READS AS UNDER:- WHERE IT APPEARS TO THE ASSESSING OFFICER THAT, OW ING TO THE CLOSE CONNECTION BETWEEN THE ASSESSEE CARRYING ON T HE ELIGIBLE BUSINESS TO WHICH THIS SECTION APPLIES AND ANY OTHER PERSON, OR FOR ANY OTHER REASON, THE COURSE OF BUSINESS BETWEEN THEM IS SO A RRANGED THAT THE BUSINESS TRANSACTED BETWEEN THEM PRODUCES TO THE AS SESSEE MORE THAN THE ORDINARY PROFITS WHICH MIGHT BE EXPECTED TO ARI SE IN SUCH ELIGIBLE BUSINESS, THE ASSESSING OFFICER SHALL, IN COMPUTING THE PROFITS AND ITA NO.878/JP/2016 M/S. MURPHY LIGHTING S ITO, WARD- 4(3), JAIPUR 5 GAINS OF SUCH ELIGIBLE BUSINESS FOR THE PURPOSES OF THE DEDUCTION UNDER THIS SECTION, TAKE THE AMOUNT OF PROFITS AS MAY BE REASONABLY DEEMED TO HAVE BEEN DERIVED THEREFROM. FROM THE ABOVE PROVISION, IT CAN BE NOTED THAT: (A) TWO CONDITIONS, CLOSE CONNECTION AND ARRANGE D, NEED TO BE CUMULATIVELY SATISFIED FOR INVOKING THE PROVI SIONS OF SECTION 80IC READ WITH SECTION 80-IA(10) OF THE ACT. (B) MERELY BECAUSE EXTRA-ORDINARY PROFIT HAS BEENMA DE, IT WOULD NOT LEAD TO ACONCLUSION THAT THE BUSINESSTRAN SACTION WAS ARRANGED FORTHE PURPOSE OF CLAIMINGHIGHER DEDUCTI ON UNDERSECTION 80IC OF THE ACT. THE AO IS TO BRING MATERIAL ON RECORD THAT BUSINE SS HAS BEEN ARRANGED TO PRODUCE MORE THAN ORDINARY PROFIT TO THE UNIT CLAIMING DEDUCTION U/S 80IC. 2. THE FOLLOWING FACTS CLEARLY DEMONSTRATE THAT THE ASSESSEE HAS NOT EARNED ANY EXTRA-ORDINARY PROFITS FROM ITS DEAL ING WITH M/S FAIRDEALS NOR IT HAS ENTERED INTO ANY ARRANGEMENT WITH M/S FAIRDEALS SO AS TO CLAIM HIGHER DEDUCTION U/S 80IC: (I) IT MAY BE NOTED THAT IN THE FIRST YEAR OF THE MANUFACTURING OF THE LED BULB BY THE BADDI UNIT I.E . IN A.Y. 2011-12, THE BADDI UNIT DECLARED A GROSS PROFIT RATE OF 55.7 4% ON TURNOVER OF RS.66,17,314/-. IN THIS YEAR, THE BADDI UNIT PURCHA SED RAW MATERIAL OF RS.15,04,194/-, FROM ITS ASSOCIATE CONCERN M/S FAIR DEALS OUT OF THE TOTAL RAW MATERIAL OF RS.34,49,774/- PURCHASED BY I T WHICH CONSTITUTED 43.60% OF THE TOTAL PURCHASES. THE RAW MATERIAL PUR CHASED BY IT FROM M/S FAIRDEALS IS COMPARABLE WITH THE RATE AT WHICH IT WAS PURCHASED FROM THE OTHER PARTIES AS PER DETAILS PLACED AT PB 9-12. THE SALES MADE IN THIS YEAR TO M/S FAIRDEALS WAS RS.15,03,778/- OU T OF TOTAL SALES OF RS.66,17,314/- WHICH CONSTITUTED 22.72 % OF THE TOT AL SALES. FROM THE DETAILS OF SALES PLACED AT PB 13, IT CAN BE NOTED THAT THE BADDI UNIT HAS SOLD THE GOODS TO NON ASSOCIATE CONCERN NAMELY INDO ASIAN FUSEGEAR LTD. @ RS. 25.48 PER BULB AND HPL ELECTRIC AND POWE R PVT. LTD. @ RS. 22.77 PER BULB GIVING AN AVERAGE RATE OF RS.24.12 P ER BULB WHEREAS THE SAME GOODS HAS BEEN SOLD TO M/S FAIRDEALS @ RS. 22 TO RS. 23 PER BULB. FROM THESE DETAILS IT IS EVIDENT THAT IN A.Y. 2011-12 THE GOODS PURCHASED FROM/SOLD TO M/S FAIRDEAL WAS AT A MARKET RATE AND IN THAT YEAR THE GROSS PROFIT OF THE ASSESSEE WAS 55.74% AN D THE NET PROFIT RATE WAS 48.11%. THEREFORE, THE GROSS PROFIT OF 47.33% A ND NET PROFIT OF 43.5% WHICH IS LOWER THAN THE GROSS PROFIT AND NET PROFIT DECLARED IN THE LAST YEAR CANT BE SAID TO BE AN ARRANGEMENT BE TWEEN THE ASSESSEE ITA NO.878/JP/2016 M/S. MURPHY LIGHTING S ITO, WARD- 4(3), JAIPUR 6 AND M/S FAIRDEALS TO SHIFT THE PROFIT WITH AN INTEN TION TO CLAIM HIGHER DEDUCTION U/S 80IC. THE AO, HOWEVER, HAS NOT ACCEPTED THIS CONTENTION O NLY FOR THE REASON THAT IN A.Y. 2011-12, ASSESSEE MADE SALES OF 22.72% OF THE TOTAL SALES TO M/S FAIRDEALS WHEREAS DURING THE YEAR ENTI RE GOODS WERE SOLD TO M/S FAIRDEALS. IN HOLDING SO HE IGNORED THE FACT THAT THE PER UNIT RATE OF LED BULB CHARGED FROM M/S FAIRDEALS IN LAST YEAR WAS 22 TO 23 PER BULB WHEREAS IT WAS MORE FROM THE NON ASSOCIATE CON CERNS. IN THIS YEAR THE RATE CHARGED FROM M/S FAIRDEALS IS LOWER THAN T HAT CHARGED IN THE PREVIOUS YEAR. THEREFORE, ONLY BECAUSE THE ENTIRE G OODS WERE SOLD TO M/S FAIRDEALS DURING THE YEAR AS AGAINST 22.72% IN THE LAST YEAR CANT LEAD TO A CONCLUSION THAT ASSESSEE HAS EARNED EXTRA ORDINARY PROFIT FROM ITS DEALING WITH M/S FAIRDEALS. IN FACT BOTH THE GR OSS PROFIT AND THE NET PROFIT DURING THE YEAR IS LOWER AS COMPARED TO THE LAST YEAR AND THEREFORE THERE CANT BE A CHARGE OF SHIFTING OF PR OFIT FOR CLAIMING HIGHER DEDUCTION U/S 80IC. (II) IN THE YEAR UNDER CONSIDERATION ASSESSEE HAS D ECLARED G.P. RATE OF 47.33% ON TURNOVER OF RS.85,50,789/-. IN THIS YEAR ASSESSEE HAS PURCHASED RAW MATERIAL OF RS.16,91,516 /- FROM M/S FAIRDEALS OUT OF TOTAL PURCHASE OF RS.28,07,364/- W HICH CONSTITUTED 60.25% OF ITS TOTAL PURCHASE. THE RATE AT WHICH PU RCHASE IS MADE BY THE ASSESSEE FROM M/S FAIRDEALS IS AT MARKET RATE A S IS EVIDENT FROM THE CHART PLACED AT PB14 SUBMITTED BEFORE THE AO FROM WHICH IT CAN BE NOTED THAT THE RATE OF PURCHASES OF VARIOUS ITEMS F ROM M/S FAIRDEALS IS AT SAME RATE OR AT A HIGHER RATE WHEN COMPARED TO T HE PURCHASE OF THE SAME ITEM FROM OTHER PARTIES.A STATEMENT INDICATING THE RATE AT WHICH PURCHASES ARE MADE BY M/S FAIRDEALS AND THE RATE AT WHICH IT WAS SOLD TO ASSESSEE IS ALSO PLACED AT PB 14 SUBMITTED TO THE AO FROM WHICH ALSO IT IS EVIDENT THAT PURCHASE MADE BY THE ASSESSEE FR OM M/S FAIRDEALS IS AT MARKET PRICE. THE AO WITHOUT FINDING ANY DEFECT IN THE RATE AT WH ICH PURCHASES ARE MADE FROM M/S FAIRDEALS AND OTHER PAR TIES HAS NOT ACCEPTED THE CONTENTION FOR THE REASON THAT THE DAT E OF PURCHASE FROM M/S FAIRDEALS IS DIFFERENT THAN THE DATE OF PURCHAS E FROM THE OTHER PARTIES. HOWEVER, HE HAS NOT BROUGHT ANY EVIDENCE O N RECORD TO PROVE THAT THE RATE AT WHICH THE ASSESSEE PURCHASED THE G OODS FROM M/S FAIRDEALS ON A PARTICULAR DATE WAS LOWER. THEREFORE IT CANT BE CONCLUDED THAT M/S FAIRDEALS HAS SHIFTED ITS PROFIT TO THE ASSESSEE FOR CLAIMING HIGHER DEDUCTION U/S 80IC. (III) THE ASSESSEE HAS SOLD THE ENTIRE GOODS DURING THE YEAR TO M/S FAIRDEALS. THE SALE IS OF RAW MATERIAL, SEMI-FI NISHED GOODS AND FINISHED GOODS. THE DETAIL OF SALES IS PLACED AT PB 15 WAS SUBMITTED ITA NO.878/JP/2016 M/S. MURPHY LIGHTING S ITO, WARD- 4(3), JAIPUR 7 TO THE AO .FROM THE SAME IT CAN BE NOTED THAT ASSESSEE HAS SO LD THE UNCONSUMED RAW MATERIAL OF RS.81,291/- TO M/S FAIRD EALS AT THE SAME RATE AT WHICH IT WAS PURCHASED FROM M/S FAIRDEALS. THIS FACT HAS BEEN ACCEPTED BY THE AO HIMSELF. THE ASSESSEE SOLD FINIS HED GOODS OF RS.9,36,353/- (LED LIGHT) @ RS. 23 PER BULB WHICH I S AT THE SAME RATE AT WHICH IT WAS SOLD IN THE LAST YEAR AND WAS COMPA RABLE TO THE RATE AT WHICH IT WAS SOLD TO OTHER PARTIES.THE REMAINING SA LES OF RS.75,33,145/- IS OF SEMI-FINISHED GOODS. THE SAME IS SOLD AT DIFFERENT RATE DEPENDING UPON THE STAGE OF COMPLETION. FOR EX AMPLE, ASSEMBLED PCB FOR LED LIGHT WITHOUT LEG CUTTING WAS SOLD IN T HE MONTH OF SEPTEMBER @ RS. 12 PER PIECE BUT BECAUSE THE ASSESS EE HAD TO WIND UP THE UNIT, IT WAS SOLD AT RS. 10 PER PIECE IN THE MO NTH OF MARCH. SAME IS THE POSITION IN RESPECT OF ASSEMBLED PCB FOR LED LI GHTS WITH CAP WHICH WAS SOLD @ RS. 16 PER PIECE BUT SUBSEQUENTLY @ RS. 13 PER PIECE. THE ASSEMBLED PCB FOR LED AFTER LEG CUTTING WAS SOLD AT RS. 14 PER PIECE. THESE RATES ARE AT MARKET RATE/LOWER THA N MARKET RATE CONSIDERING THE FACT THAT THE RATE OF FINISHED BULB IS RS. 23 PER BULB AND THE COST INVOLVED IN MAKING THE SEMI-FINISHED GOODS TO FINISHED GOODS IS BETWEEN RS. 3.60 TO 5.23 PER PIECE AS PER THE DE TAILS PLACED AT PB 16 SUBMITTED BEFORE THE AO. IF THIS COST IS REDUCED FR OM SALE RATE OF FINISHED GOODS OF RS.23 PER BULB, THE SALE VALUE OF SEMI FINISHED GOODS WORKS OUT AT RS. 18 TO 19 PER PIECE WHEREAS IT IS S OLD @ RS.10 TO 16 PER PIECE. THIS PROVES THE RATE AT WHICH SEMI FINISHED GOODS ARE SOLD TO M/S FAIRDEAL IS EVEN LOWER THAN THE MARKET RATE. I T IS FOR THIS REASON THAT THE G.P. RATE OF 47.33% AND N.P. RATE OF 43.50 % IS LOWER AS COMPARED TO THE G.P. RATE AND N.P. RATE DECLARED IN THE LAST YEAR EVEN WHEN THE VOLUME OF PURCHASE AND SALE WITH M/S FAIRD EALS IS HIGHER DURING THE YEAR AS COMPARED TO LAST YEAR. ALL THESE SHOWS THAT THE TRANSACTIONS MADE WITH M/S FAIRDEALS IS AT MARKET R ATE AND THE ALLEGATION THAT BY MAKING TRANSACTION WITH M/S FAIR DEALS SUPER PROFIT IS EARNED TO CLAIM DEDUCTION U/S 80IC IS INCORRECT. THE AO ACCEPTED THAT THE RAW MATERIAL WAS SOLD BY T HE ASSESSEE TO M/S FAIRDEALS AT THE SAME RATE AT WHICH IT WAS P URCHASED. HOWEVER IN RESPECT OF FINISHED GOODS AND SEMI FINISHED GOOD S HE HELD THAT THE CONTENTION OF THE ASSESSEE IS NOT TENABLE AS THE RA TE AT WHICH THESE GOODS WERE SOLD TO M/S FAIRDEALS COULD NOT BE VERIF IED IN ABSENCE OF ANY SALES MADE BY THE ASSESSEE TO OTHER PARTIES. HO WEVER AT THE SAME TIME THE AO HAS NOT BROUGHT ON RECORD ANY EVIDENCE THAT THE MARKET RATE OF THE GOODS SOLD BY THE ASSESSEE TO M/S FAIRD EALS WAS LOWER THAN THE RATE AT WHICH IT WAS SOLD TO M/S FAIRDEALS. THE REFORE WITHOUT BRINGING ANY MATERIAL ON RECORD, IT CANT BE PRESUM ED THAT ASSESSEE HAS SOLD GOODS TO M/S FAIRDEALS AT A HIGHER RATE TO EAR N SUPER PROFIT WITH THE INTENTION TO CLAIM HIGHER DEDUCTION U/S 80IC. ITA NO.878/JP/2016 M/S. MURPHY LIGHTING S ITO, WARD- 4(3), JAIPUR 8 (IV) THE AO HAS WORKED OUT THE CONSOLIDATED NET PRO FIT RATE OF THE ASSESSEE AND M/S FAIRDEALS AT 7.12% AND APPL IED SUCH N.P. RATE TO THE TURNOVER OF THE ASSESSEE, THEREBY ESTIMATING THE NET PROFIT OF THE ASSESSEE AT RS.6,08,816/- AS AGAINST RS.36,15,771/- DECLARED BY THE ASSESSEE AND THEREBY DISALLOWED THE CLAIM OF DEDUCT ION U/S 80IC AT RS.30,06,955/-. THE ENTIRE WORKING MADE BY THE AO I S INCORRECT. THIS IS FOR THE REASON THAT FIRSTLY M/S FAIRDEALS DOES N OT DEAL IN LED BULB ONLY. IT DEALS IN VARIOUS ITEMS I.E. CFL, GLS BULB, PL, REFLECTOR BULB, INFRARED BULB ETC. WHICH ARE TRADITIONAL PRODUCT WH ERE THERE IS LOT OF COMPETITION AND THE MARGIN IS MUCH LESS AS COMPARED TO THE LED BULB WHICH WAS A NEW AND INNOVATIVE PRODUCT AT THAT POIN T OF TIME. THIS IS ALSO EVIDENT FROM THE LIST OF INVENTORY MENTIONED I N THE TAX AUDIT REPORT. SECONDLY, THE TURNOVER OF M/S FAIRDEALS IS RS.443 LACS WHEREAS ASSESSEES TURNOVER IS ONLY RS. 85 LACS THAT TOO MA INLY OF SEMI-FINISHED GOODS. THIRDLY, APPLICATION OF CONSOLIDATED N.P. RA TE IS NOT JUSTIFIED IN AS MUCH AS THE PURCHASE/SALE TRANSACTION WITH M/S F AIRDEALS RELATES TO THE TRADING ACCOUNT ONLY AND THERE IS NO EXPENDITUR E RELATING TO THE ASSESSEE WHICH IS INCURRED BY M/S FAIRDEALS. MOREOV ER, DUE TO THE LARGE SCALE OF OPERATIONS, THE INDIRECT EXPENSES LIKE SAL ARY, MAINTENANCE, ETC. ARE MUCH HIGHER OF M/S FAIRDEALS IN COMPARISON TO T HE ASSESSEE, FURTHER REDUCING ITS N.P. RATE.THEREFORE WHAT IS RELEVANT I S THE G.P. RATE AND NOT THE N.P. RATE. FURTHER THE PROFIT RATE OF THE ASSES SEE IS HIGHER THAN M/S FAIRDEALS AS THE ASSESSEES UNIT AT BADDI WAS EXEMP TED FROM EXCISE DUTY AND THE CST WAS APPLICABLE @ 1% WHEREAS M/S FA IRDEALS IS LIABLE TO EXCISE DUTY @5%/6% AND CST @ 2%. THEREFORE THE B ENEFIT OF THESE LEVIES HAS RESULTED IN BETTER MARGIN FOR THE ASSESSEE AS COMPARED TO M/S FAIRDEALS. THEREFORE APPLYING CONSOLIDATED N .P. RATE OF THE ASSESSEE AND M/S FAIRDEALS TO THE TURNOVER OF THE A SSESSEE TO ESTIMATE ITS PROFIT IS FALLACIOUS AND INCORRECT. THE AO HAS NOT ACCEPTED THE ABOVE CONTENTION BY INC ORRECTLY HOLDING THAT BOTH THE FIRMS ARE ENGAGED IN THE SAME NATURE OF BUSINESS WHEREAS IT IS A FACT ON RECORD THAT ASSESSEE IS ENG AGED ONLY IN LED BULBS WHEREAS M/S FAIRDEALS IS DEALING IN ALL VARIE TIES OF BULB AS STATED ABOVE. FURTHER THE G.P. RATE/NET PROFIT RATE OF M/S FAIRDEALS CANT BE COMPARED WITH THAT OF THE ASSESSEE CONSIDERING THE TURNOVER, LOCATION, TAX BENEFITS, ADMINISTRATIVE SET UP, NATURE OF PROD UCTS DEALT ETC. THE AO HAS NOT BROUGHT ANY EVIDENCE ON RECORD THAT ANY OF THE PURCHASE MADE BY THE ASSESSEE FROM M/S FAIRDEALS IS AT LOWER THAN THE MARKET RATE OR ANY OF THE SALES MADE BY THE ASSESSEE TO M/S FAIRDE ALS IS AT HIGHER THAN THE MARKET RATE. HENCE WITHOUT EVIDENCE IT CANT BE PRESUMED THAT THE COURSE OF BUSINESS BETWEEN THE ASSESSEE AND M/S FAI RDEALS HAS BEEN SO ARRANGED THAT IT PRODUCES MORE THAN ORDINARY PROFIT TO THE ASSESSEE. 3. FROM THE ABOVE DISCUSSION AND FACTS ON RECORD IT CAN BE NOTED THAT ASSESSEE HAS PRODUCED MATERIAL ON RECORD TO SU PPORT THAT ITS ITA NO.878/JP/2016 M/S. MURPHY LIGHTING S ITO, WARD- 4(3), JAIPUR 9 TRANSACTION WITH M/S FAIRDEALS ARE AT MARKET RATE. AO HAS NOT BROUGHT ANY MATERIAL OR EVIDENCE ON RECORD TO PROVE THAT TH ESE TRANSACTIONS ARE NOT AT MARKET RATE. THEREFORE, ONLY BY MAKING THEOR ETICAL OBSERVATIONS, IT CANT BE PRESUMED THAT THE DEALINGS BETWEEN THE ASSESSEE AND M/S FAIRDEALS HAS BEEN ARRANGED SO AS TO PRODUCE MORE T HAN EXTRAORDINARY PROFIT TO THE ASSESSEE. IT IS PERTINENT TO MENTION THAT THE G.P. RATE AND THE N.P. RATE DECLARED BY THE ASSESSEE IN A.Y. 2011-12 HAS BEEN ACCEPTED. IN THE YEAR UNDER CONSIDERATION THE G.P. RATE AND N .P. RATE DECLARED BY THE ASSESSEE IS LOWER AS COMPARED TO THE LAST YEAR. RELIANCE IN THIS CONNECTION IS PLACED ON THE FOLLOWING CASES:- 1. CIT VS. DELHI PRESS PATRAPRAKASHAN(2013) 355 ITR 0001 (DELHI)(HC) [PB 73-80] 2. HONEYWELL AUTOMATION INDIA LTD. VS. DCIT (2015) 43 CCH 0371 (PUNE)(TRIB.) [PB 81-83] 3. A.T. KEARNEY INDIA PVT. LTD. VS. ACIT (2014) 41 CCH 0418 (DEL)(TRIB.) [PB 84-90] 4. AQUILA SOFTWARE SERVICE HYDERABAD (P.) LTD. VS. DCIT 42 ITR (TRIB.) 0630 (HYD.) (TRIB.) [PB 91-95] 4. IT IS FURTHER SUBMITTED THAT THE APPLICATION OF THE COMBINED NET PROFIT RATE OF 7.12% APPLIED BY THE AO FOR DETERMIN ING THE PROFIT OF THE ASSESSEE IS GROSSLY INCORRECT AND UNJUSTIFIED. IT M AY BE NOTED THAT THE ASSESSEE IS DEBT FREE CONCERN AND HAS SMALL ADMINIS TRATIVE SET UP WHEREAS M/S FAIRDEALS HAS SIGNIFICANT DEBTS AND A B IGGER ADMINISTRATIVE SET UP. M/S FAIRDEALS, THEREFORE, HAS TO INCUR THE INTEREST COST AND THE HIGHER ADMINISTRATIVE COST. THE INTEREST PAID BY M/ S FAIRDEALS IS RS.25,50,283/- (INCLUDING INTEREST PAID TO PARTNERS ) AND THE ADMINISTRATIVE EXPENSES INCURRED IS RS.59,72,414/-. AS AGAINST THIS ASSESSE HAS NOT INCURRED ANY INTEREST COST AND THE ADMINISTRATIVE EXPENDITURE INCURRED BY IT IS ONLY RS.3,37,243/-. I T IS NOT THE CASE OF THE AO THAT SUCH EXPENDITURE PERTAINING TO THE ASSESSEE HAS BEEN BOOKED IN THE EXPENDITURE OF M/S FAIRDEALS. THEREFORE THE COM PUTATION OF THE COMBINED NET PROFIT RATE TO ARRIVE AT THE PROFITS O F THE ASSESSEE FOR ALLOWING CLAIM OF DEDUCTION U/S 80IC IS OTHERWISE I NCORRECT. 5. THE LD. CIT(A) AFTER CONSIDERING THE ABOVE SUBMI SSION AGREED THAT A COMBINED N.P. RATE OF 7.12% APPLIED BY THE A O TO DETERMINE THE PROFIT OF THE ASSESSEE ELIGIBLE FOR DEDUCTION U/S 8 0IC IS NOT CORRECT. HOWEVER, WITHOUT FINDING ANY SPECIFIC FAULT IN THE EXPLANATION SUBMITTED BY THE ASSESSEE, SHE APPLIED N.P. RATE OF 30% AS AGAINST 43.5% DECLARED BY THE ASSESSEE. THERE IS NO BASIS F OR THE SAME. NO MATERIAL IS BROUGHT ON RECORD THAT ASSESSEE HAS ARR ANGED THE BUSINESS TRANSACTION IN MANNER SO AS TO PRODUCE MORE THAN OR DINARY PROFIT TO THE ASSESSEE. THE N.P. RATE OF 48.11% IS ACCEPTED BY TH E AO IN THE LAST YEAR AND THEREFORE N.P. RATE OF 43.50% DECLARED DUR ING THE YEAR CANNOT ITA NO.878/JP/2016 M/S. MURPHY LIGHTING S ITO, WARD- 4(3), JAIPUR 10 BE SAID TO BE AN ARRANGEMENT BY WHICH EXTRAORDINARY PROFIT IS DECLARED TO CLAIM HIGHER DEDUCTION U/S 80IC. THE LD. CIT(A) IS THEREFORE NOT CORRECT IN DIRECTING THAT THE PROFIT OF THE ASSESSE E BE WORKED OUT BY APPLYING N.P. RATE OF 30% FOR ALLOWING DEDUCTION U/ S 80IA. IN VIEW OF THE ABOVE, THE AO BE DIRECTED TO ACCEPT THE N.P. RATE DECLARED BY THE ASSESSEE AND ALLOW DEDUCTION U/S 80 IA ACCORDINGLY. 2.3 ON THE OTHER HAND, THE LD. DR RELIED ON THE ORD ERS OF THE AUTHORITIES BELOW. 2.4 I HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE MATERIALS AVAILABLE ON RECORD. BRIEF FACTS OF THE CASE ARE TH AT THE ASSESSEE FIRM IS ENGAGED IN THE BUSINESS OF TRADING AND MANUFACTURIN G OF ELECTRICAL BULBS AND CFL AND THEIR COMPONENTS. DURING THE YEAR UNDER CONSIDERATION , THE TOTAL TURNOVER OF RS. 85,52,789/-, GROSS PROFIT OF RS. 40,48,319/- RESULTING INTO GROSS PROFIT RATE OF 47.33% HAS BEEN DECLARED BY THE ASSESSEE. IT IS NOTED THAT ASSESSEE SUBMITTED THE BOOKS OF ACCOUNTS , CONSISTING OF CASH, JOURNAL LEDGER, BANK BOOKS, PURCHASE AND SALES VOUC HERS, BILLS AND VOUCHERS FOR EXPENSES WERE PRODUCED AND THEY WERE P UT TO TEST CHECK BY THE AO. IT IS ALSO NOTED FROM THE RECORDS THAT THE ASSESSEE CLAIMED 100% DEDUCTION U/S 80IC ON THE NET PROFIT DECLARED BY IT AT ITS BRANCH OFFICE AT BADDI. ON PERUSAL OF THE DETAILS FILED BY THE ASSES SEE, THE AO OBSERVED THAT THE ASSESSEE AS WELL AS ITS SISTER CONCERN M/S FAIRDEALS ARE DEALING IN THE SAME NATURE OF BUSINESS I.E. TRADING AND MANUFA CTURING OF ELECTRICAL BULBS, CFL, LED LIGHTS AND THEIR COMPONENTS. DURING THE YEAR, ASSESSEE ITA NO.878/JP/2016 M/S. MURPHY LIGHTING S ITO, WARD- 4(3), JAIPUR 11 HAS PURCHASED ALMOST 65% OF RAW MATERIALS FROM ITS SISTER CONCERN M/S FAIRDEALS AND ALL THE FINISHED GOODS WERE SOLD TO T HEM. THE ASSESSEE HAS SHOWN A NET PROFIT OF RS.37,19,701/- GIVING N.P. RA TE OF @43.50% ON THE TURNOVER OF RS.85,50,789/- WHEREAS M/S FAIRDEALS HA S SHOWN A NET PROFIT OF RS.41,954/- ON THE TURNOVER OF RS.4,43,02,101/- GIVING N.P. RATE OF 0.094%. THE AO, THEREFORE, APPLIED THE PROVISIONS O F SECTION 80IA(10) AND PROPOSED TO ESTIMATE THE NET PROFIT OF THE ASSE SSEE FIRM BY APPLYING THE COMBINED NET PROFIT RATE OF 7.12% DECLARED BY T HE ASSESSEE AND ITS SISTER CONCERN. ACCORDINGLY, HE APPLIED THE CONSOLI DATED NET PROFIT RATE OF 7.12% ON THE TURNOVER OF THE ASSESSEE AS AGAINST TH E NET PROFIT RATE OF 43.50% DECLARED BY THE ASSESSEE AND DETERMINED THE NET PROFIT OF THE BADDI UNIT AT RS.6,08,816/- AND RESTRICTED THE CLAI M OF DEDUCTION U/S 80IC TO THAT EXTENT AS AGAINST RS.36,15,771/- CLAIMED BY THE ASSESSEE RESULTING INTO DISALLOWANCE OF CLAIM OF DEDUCTION U/S 80IC BY RS.30,06,960/- . IN FIRST APPEAL, THE LD. CIT(A) CONFIRMED THE ACTION OF AO IN HOLDIN G THAT PROVISIONS OF SECTION 80-IA(10) ARE APPLICABLE. HOW EVER, SHE HELD THAT PROFIT OF THE ASSESSEE BE DETERMINED BY APPLYING N. P. RATE OF 30% AS AGAINST N.P. RATE OF 43.5% CLAIMED BY THE ASSESSEE, THEREBY ALLOWING THE DEDUCTION U/S 80IC AT RS.25,65,237/-. TAKING INTO C ONSIDERATION ALL THE FACTUAL ASPECTS OF THE CASE, IT IS WELL ESTABLISHES THAT THERE IS SUFFICIENT ITA NO.878/JP/2016 M/S. MURPHY LIGHTING S ITO, WARD- 4(3), JAIPUR 12 MATERIAL TO ESTABLISH THE CLOSE OF NEXUS BETWEEN TH E ASSESSEE AND M/S. FAIRDEALS IN MANIPULATING THE PROFIT TO CLAIM HIGHE R RATE OF DEDUCTION U/S 80IA OF THE ACT. THE MAJOR PART OF RAW MATERIALS WE RE PURCHASED FROM SISTER CONCERN M/S. FAIRDEALS AND TOTAL SALES WERE ALSO MADE TO IT. SUCH ARRANGEMENTS HAVE BEEN MADE TO INFLATE PROFIT OF AS SESSEE AND CLAIM HIGHER 80IC DEDUCTIONS AND AVOID THE TAX PAYMENTS. IN MY CONSIDERED VIEW, THE LD. CIT(A) WAS FAIR ENOUGH TO GIVE SUFFIC IENT RELIEF TO THE ASSESSEE AND THERE IS NO FURTHER SCOPE FOR ANY GIVI NG ANY RELIEF TO THE ASSESSEE. THUS THE APPEAL OF THE ASSESSEE IS DISMIS SED. 3.0 IN THE RESULT, THE APPEAL OF THE ASSESSEE IS DI SMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 27 /02/20 17. SD/- HKKXPUN ( BHAGCHAND) YS[KK LNL;@ ACCOUNTANT MEMBER TK;IQJ@ JAIPUR FNUKAD@ DATED:- 27 /02/ 2017 *MISHRA VKNS'K DH IZFRFYFI VXZSF'KR@ COPY OF THE ORDER FORWARDED TO: 1. VIHYKFKHZ@ THE APPELLANT- M/S. MURPHY LIGHTING, JAIPUR 2. IZR;FKHZ@ THE RESPONDENT- THE ITO, WARD- 4(3), JAIPUR 3. VK;DJ VK;QDRVIHY@ CIT(A). 4. VK;DJ VK;QDR@ CIT, 5. FOHKKXH; IZFRFUF/K] VK;DJ VIHYH; VF/KDJ.K] T;IQJ@ DR, ITAT, JAIPUR 6. XKMZ QKBZY@ GUARD FILE (ITA NO. 878/JP/2016) VKNS'KKUQLKJ@ BY ORDER, LGK;D IATHDKJ @ ASSISTANT. REGISTRAR