TMI Blog2010 (10) TMI 711X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd. The iron ore purchased included high grade lumpy ore and high grade iron ore powder. The rate at which the assessee purchased from its subsidiary was Rs. 85 per DLT for high grade iron ore powder and Rs. 80 per DLT for the high grade lumpy iron ore. The Assessing Officer held that the prevailing rates of sale/purchase of the same grade of iron ore in the State of Goa were lower than the rate at which the assessee had purchased the ore from its subsidiary. The Assessing Officer noted that M/s. Orient Goa Pvt. Ltd. had purchased high grade iron ore at Rs.62.30 and high grade lumpy ore at Rs. 59.64 per DLT. On this basis, the Assessing Officer concluded that the rate at which the assessee had purchased the ore from its subsidiary were higher than the market rate and, therefore, the provisions of section 40A(2) of the Act were attracted. After making calculations, the Assessing Officer disallowed the expenditure to the extent of Rs. 49,30,488, under section 40A(2) of the Act. Aggrieved by the assessment order, the assessee filed an appeal before the Commissioner of Income-tax (Appeals) at Belgaum. The appeal was filed against the disallowance of the expenditure to the extent of Rs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e rate of ore at Rs. 85 per DLT and at Rs. 80 per DLT respectively, purchased from its subsidiary M/s. Dempo Mining Corporation Pvt. Ltd., is contrary to evidence relied on by the Assessing Officer proving the fair market rate at the relevant time and therefore against the provision of section 40A(2) ?" 3. After hearing the counsel for the parties, we have reframed the question as follows : "Whether in the facts and circumstances of the case, the Income tax Appellate Tribunal was right in confirming the order of the Commissioner of Income-tax (Appeals) setting aside the order of the Assessing Officer adding Rs. 49,30,488 under section 40A(2) of the Income-tax Act ?" 4. Clause (a) of sub-section (2) of section 40A of the Income-tax provides that where the assessee incurs any expenditure in respect of which payment has been or is to be made to any person referred to in clause (b) of the sub-section and the Assessing Officer is of the opinion that such expenditure is excessive or unreasonable having regard to the fair market value of the goods, services or facilities for which the payment is made or the legitimate needs of the business or profession of the assessee or the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee, as an exporter, was exporting a huge quantity of iron ore. It was assured of supply of a huge quantity of iron ore as well as quality of iron ore by reason of the fact that it had entered into a contract with its subsidiary. He has also held that both the assessee and its subsidiary were companies paying tax at the same rate and, therefore, there was no question of tax evasion. These findings are not open for challenge in this appeal. 6. In our view, in a business of export consistency of supply as well as quality of supply is important. In order to assure a consistent supply of material of the same quality the purchaser of a commodity may pay to a seller bound under a contract a little higher than the current rate. Furthermore, in case of yearly contracts by agreeing to buy goods at a specified rate the exporter is insulated from vagaries of any seasonal rise in the market rate. Therefore, unless the rate agreed is so very much excessive or unreasonable as to doubt the objective behind the agreement, it cannot be said that the rate, a little higher than the seasonal market rate is unjustified or amounts to diversion of profit. In this connection, the fact that the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 10 and 11 of the decision. She submitted that once it was held that the payment was made to a related person mentioned in clause (b) of section 40A(2) of the Act, the burden shifted on the assessee and it was the duty of the assessee to discharge the burden by leading proper evidence that the provisions of section 40A(2) were not attracted to the assessee's case. The basic requirement for the applicability of section 40A(2) of the Act is that the payment must be made to a related person, i.e., to a person referred to in clause (b), of sub-section (2) of section 40A of the Act. In the facts and circumstances of the case, we are of the view that the payment in the case at hand was not made to a person mentioned in clause (b) of section 40A(2) of the Act for the reasons indicated below. 9. Clause (a) of sub-section (2) of section 40A of the Act provides that where the assessee incurs any expenditure in respect of which payment has been or is to be made to any person referred to in clause (b) of the sub-section and the Assessing Officer is of the opinion that such expenditure is excessive or unreasonable having regard to the fair market value of the goods, services or facilities f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... person who carries on a business or profession, (A) where the assessee being an individual, or any relative of such assessee, has a substantial interest in the business or profession of that person ; or (B) where the assessee being a company, firm, association of persons or Hindu undivided family, or any director of such company, partner of such firm or member of the association or family, or any relative of such director, partner, or member, has a substantial interest in the business or profession of that person. Explanation.-For the purposes of this sub-section, a person shall be deemed to have a substantial interest in a business or profession, if, (a) in a case where the business or profession is carried on by a company, such person is, at any time during the previous year, the beneficial owner of shares (not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profit) carrying not less than twenty per cent. of the voting power ; and (b) in any other case, such person is, at any time during the previous year, beneficially entitled to not less than twenty per cent. of the profits of such business or profession." ..... X X X X Extracts X X X X X X X X Extracts X X X X
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