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2015 (6) TMI 94 - ITAT MUMBAI

2015 (6) TMI 94 - ITAT MUMBAI - [2015] 43 ITR (Trib) 234 (ITAT [Mum]) - Addition u/s 92 - CIT(A) upholding the arm's length brokerage rate for yarn product at 2% as determined by Ld. AO as against 0.75% actually received by the appellant - whether 2nd proviso to section 92C(3) merely requires an "opportunity of being heard" to be given to assessee and nothing beyond that as held by CIT(A) - Held that:- Since the costs of all the raw materials is picked up by the assessee for all effective purpos .....

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ociated enterprises, therefore, is rejected.

There is no denial of the fact that Mr. Govind Karunakaran is Director and 99.9% shareholder of the assessee company and also is a Director and Chief Operating Officer of Kaybee Exim Pte Limited, Singapore. Therefore, Mr. Govind Karunakaran is not only participates in management of both the companies by he is holding the key position in the management of Kaybee Exim Pte Limited, Singapore and is part of decision making process of the said c .....

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ital as prescribed under clause (a) & (b) of s.s. (1) of section 92A is satisfied. Hence, the assessee and Kaybee Exim Pte Limited, Singapore falls under the meaning of AEs as per the provisions of section 92A. - Decided against assesse.

TP adjustment on account of service charges/commission received by the assessee in respect of procurement of yarn on behalf of Kaybee Exim Pte Limited, Singapore (AE) - held that:- The armís length price in relation to an international transaction sha .....

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ent from its AE for the purpose of armís length commission for procurement of yarn, therefore, the price/transaction adopted by the A.O. is not an independent or uncontrolled price or transaction but it was a controlled transaction between related parties. Hence, the armís length price adopted by the A.O. is not sustainable as per the provisions of the Act. - remit the issue to the record of the A.O. for determination of the same afresh - Decided in favour of assesse for statistical purposes. < .....

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roceeded only on the assumption and not on any tangible material or fact. Though the issue was decided by the Commissioner for the A.Y. 2004-05, however, the said order was not challenged before the Tribunal. We find that neither the A.O. has conducted the enquiry nor the assessee has produced any evidence in support of the claim that this payment was made by the assessee as per the mutual understanding. This issue required proper examination and verification -remit the issue to the record of th .....

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ounds of appeal:- 1. Under the facts and circumstances of Appellant's case and in law, the learn Commissioner of Income-Tax (Appeal)-15 ['CIT(A)'] grossly erred in upholding addition of ₹ 1, 13,21,9021- made by the Ld. Assessing Officer (AO') u/s 92 of Income-Tax Act, 1961 (Act') when the appellant does not fall within the ambit of said section 92 of the Act. 2. Under the facts and circumstances of Appellant's case and in law, the Ld. CIT(A) grossly erred in holding .....

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notice to assessee. 2.3 The Ld. CIT(A) grossly erred in holding that 2nd proviso to section 92C(3) merely requires an "opportunity of being heard" to be given to assessee and nothing beyond that. 2.4 The Ld. CIT(A) grossly erred in holding in para 4.6(iv) of his appellate order that the legal infirmity committed by Ld. AO on account of failure of the Ld. AO to afford the appellant the opportunity, which is mandatory in terms of section 92C(3) of the Act, can be cured by the CIT(A) by .....

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(3). 3. Under the facts and circumstances of Appellant's case and in law, the Ld. CIT(A) grossly erred in holding the Appellant (namely, Kaybee Private Limited) and Kaybee Exim Pte Limited Singapore as associated enterprises CAEs) in terms of section 92A(1) as well as in terms of section 92A(2)U) of the Act. 3.1 Contrary to the facts on record, the Ld. CIT (A) grossly erred in holding that Mr. Vikram Chand indirectly holds more than 26% shareholding in Appellant through Mr. Govind Karunakara .....

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n 92A(1) of the Act. 3.4 Contrary to the facts on record, the Ld. CIT(A) grossly erred in holding that the Appellant has not denied that Mr. Deepak Gurnani was not a common director of Appellant and Kaybee Exim Pte Limited Singapore. 3.5 The Ld. CIT(A) grossly erred in not appraising and appreciating the legal position emerging from the Appellants' authenticated and relevant documentary evidences filed before him for the relevant period in the course of appellate proceedings regarding the sh .....

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nternational transaction with its alleged AE and hence it does not represent an arm's length price as defined u/s 92F(ii) of the Act. 4.2 The Ld. CIT(A) grossly erred in rejecting the market driven uncontrolled comparable instances of yarn brokerage rates ranging from 0.5% to 0.75% of shipment value furnished by the Appellant. 4.3 The Ld. CIT (A) grossly erred in holding that Ld. AO can determine arm's length price based on estimation and best judgment without appreciating that the provi .....

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lant for the premises from where it conducts its business. 3. Ground No. 1 to 3 are regarding the question whether the asessee and Kaybee Exim Pte Limited Singapore are Associated Enterprise (AEs) in terms of section 92A(1)/92A(2)(i) of the Income Tax Act, 1961. 4. The assessee is engaged in the business of running business centre by providing amenities. The assessee has also received service charges/commission charges for making purchase of textiles, yarns etc on behalf of Kaybee Exim Pte Limit .....

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are not AEs within the meaning of section 92A of the Act. The A.O. found that as per the Website of Kaybee group, M/s Kaybee Exim Pte Limited, Singapore is based in Singapore and as per their various locations, one of the locations is shown in India and the assessee is a representative company of Kaybee group. It was further found that Mr. Kumar Chand is the Chairman, Mr. Vikram Chand, Managing Director, Mr. Suresh Melwani, Vice Chairman, Mr. Deepak Gurnani, Director, Mr. Govind Karunakaran, Chi .....

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er dated 14-12-2010 and submitted that the assese and Kaybee Exim Pte Limited, Singapore do not fall within the ambit of section 92A of the Act. After considering the list of Directors since its inception, the A.O. held that the assessee and Kaybee Exim Pte Limited, Singapore are AEs in terms of section 92A of the Act. To arrive at the conclusion that the assessee and Kaybee Exim Pte Limited, Singapore are AEs, the A.O. has referred various information obtained from the Website of the Kaybee Gro .....

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the ld. CIT(A) and contended that the assessee and Kaybee Exim Pte Limited, Singapore are not AEs in terms of section 92A of the Act. It was contended before the ld. CIT(A) that Kaybee Exim Pte Limited, Singapore does not hold any direct or indirect share holding in assessee company and neither the assessee holding any share in Kaybee Exim Pte Limited, Singapore. Mr. Govind Karunakaran got 99.9% share in the assessee company and one share is held by Mr. Deepak Gurnani but Mr. Govind Karunakaran .....

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mbit of AEs as per section 92A of the Act. The ld. CIT(A) did not agree with the contention of the assessee and confirmed with the view of the A.O. by holding that the assessee and Kaybee Exim Pte Limited, Singapore are AEs as per provisions of section 92A of the Act. 5. Before us, Shri P. Pardiwala, the ld. Sr. counsel for the assessee has submitted that the conditions as prescribed under s.s. (2) of section 92A are not satisfied, therefore, the assessee and Kaybee Exim Pte Limited, Singapore d .....

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f Finance Bill 2002 reported in 254/190 and submitted that it has been clarified in the Memorandum that the mere fact of participation by one enterprise in the management or control or capital of other enterprise or the participation of one or more person in the management or control or capital of both enterprises shall not make them AEs, unless the criteria specified in s.s. (2) are fulfilled. Thus, the ld. Sr. counsel has contended that the condition stipulated under clause (a) & (b) of s. .....

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ommon shareholding of these two companies, therefore, none of the criteria provided under s.s. (2) of section 92A are fulfilled. The ld. Sr. counsel has referred to various clauses of s.s. (2) of section 92A and submitted that the requirement of two enterprises deem to be AEs has been specified in these clauses and, therefore, these specific criteria are required to be fulfilled. In the case of the assesee, none of the enterprises hold direct or indirect share carrying not less than 26% of votin .....

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ties below had applied clause (j) of s.s. (2) of section 92A to treat the assessee and Kaybee Exim Pte Limited, Singapore to be AEs. However, the control of these companies is not in the hands of one individual or his relative or jointly by such individual and relative. Therefore, the assessee and Kaybee Exim Pte Limited, Singapore do not fall within the purview of the expression AE as per section 92A of the Act. The conditions stipulated under s.s. (2) of section 92A are to be fulfilled mandato .....

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would be treated as participating directly or indirectly or through one or more intermediary in the management or control or capital of the other enterprise. Therefore, in order to understand the correct meaning of the term participation directly or indirectly in the management or control or capital of the enterprise, the criteria prescribed in s.s. (2) of section 92A have to be taken into consideration. 6. On the other hand, the ld. D.R. has submitted that s.s. (2) of section 92A does not rest .....

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2012] 19 ITR (Trib) 312 (Mumbai). The ld. D.R. also relied upon the orders of authorities below. 7. We have considered the rival submissions as well as relevant material placed on record. The language of section 92A(1) is unambiguous and does not leave any scope of importing any meaning of expression AE . The question raised before us is whether the meaning of expression AE as per s.s. (1) of section 92A is subjected to s.s. (2) of section 92A. The ld. Sr. counsel for the assessee has asserted t .....

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the other enterprise; or (b) in respect of which one or more persons who participate, directly or indirectly, or through one or more intermediaries, in its management or control or capital, are the same persons who participate, directly or indirectly, or through one or more intermediaries, in the management or control or capital of the other enterprise. (2) For the purposes of sub-section (1), two enterprises shall be deemed to be associated enterprises if, at any time during the previous year,- .....

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e guarantees not less than ten per cent of the total borrowings of the other enterprise; or (e) more than half of the board of directors or members of the governing board, or one or more executive directors or executive members of the governing board of one enterprise, are appointed by the other enterprise; or (f) more than half of the directors or members of the governing board, or one or more of the executive directors or members of the governing board, of each of the two enterprises are appoi .....

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er enterprise has exclusive rights; or (h) ninety per cent or more of the raw materials and consumables required for the manufacture or processing of goods or articles carried out by one enterprise, are supplied by the other enterprise, or by persons specified by the other enterprise, and the prices and other conditions relating to the supply are influenced by such other enterprise; or (i) the goods or articles manufactured or processed by one enterprise, are sold to the other enterprise or to p .....

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of a member of such Hindu undivided family or jointly by such member and his relative; or (l) where one enterprise is a firm, association of persons or body of individuals, the other enterprise holds not less than ten per cent interest in such firm, association of persons or body of individuals; or (m) there exists between the two enterprises, any relationship of mutual interest, as may be prescribed. 8. The meaning of AEs as provided under s.s. (1) of section 92A and if the condition provided i .....

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on are fulfilled. It has no general application in respect of the meaning AE . Even otherwise, s.s. (1) of section 92A does not begun with the subjective clause subject to s.s. (2) . The ld. Sr. counsel for the assessee has referred and placed reliance on the Memorandum explaining the provisions of the Finance Bill, 2002 whereby s.s (2) of section 92A has been amended and the clarification is provided as under:- The existing provisions contained in section 92A of the Income-tax Act to provide as .....

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ssed that s.s. (2) is a deeming fiction and, therefore, the condition/criteria specified therein are required to be fulfilled. As it is clear from the criteria enumerated in clause (a) to (m) of s.s. (2) of section 92A that none of the clauses prescribed any criteria in respect of one enterprise participate directly or indirectly or through one or more intermediaries in the management which is one of the conditions prescribed under clauses (a) & (b) of s.s. (1) of section 92A of the Act. The .....

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o consider the meaning of AE as per section 92A (1) & (2) in para 10 & 11 as under:- 10. We find that, in terms of the provisions of section 92A(l )(a), the expression 'associated enterprises' refers to an enterprises "which participates, directly or indirectly, or through one or more intermediaries, in the management or control or capital of the other enterprise". The scope of 'associated enterprises' is expanded further by section 92A(I)(b), taking into accoun .....

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ectly or through an intermediary, in the management or control or capital of two or more enterprises, such enterprises are required to be treated as 'associated enterprise'. Interestingly even as definition of 'associated enterprises' has crucial references to 'participation in management or control or capital' at some places, the precise scope of this expression has not been defined under the provisions of the Incometax Act, and it has not come up for judicial adjudicati .....

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trol is essentially an effective control in decision making process. 11. In our considered view, therefore, the definition of associated enterprises in section 92A( 1 )(a) and (b ) is, what can be termed as, basic rule. In plain terms, the basic rule is that when one enterprise participates in the control or management or capital of the other enterprise (directly or indirectly or through one or more intermediaries) or when persons participating (directly or indirectly or through one or more inte .....

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y same interests, these enterprises are required to be treated as 'associated enterprise'. Section 92A(2) gives practical illustrations of this kind of a control. All these illustrations deal with simple situations of dealing with two enterprise, as envisaged in section 92A(1)(a), but these are equally good for application in situations involving more than two enterprise, as envisaged in section 92A(1)(b). Section 92A(2)(e), for example, refers to a situation in which "more than hal .....

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prises are required to be treated as 'associated enterprises' but when the same basis extends to more than two enterprises, these enterprises will not be associated enterprises. That is clearly an incongruous result. In our considered 'view, as all clauses of deeming fictions set out in section 92:(2) are only illustration of the manner in which this de facto control on decision making exists, It is necessary that, while interpreting these deeming fictions, we interpret the same in s .....

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olly dependent on the use of trademarks in respect of which the assessee has exclusive rights. This relationship meets the test of de facto control on decision making as set out in section 92A(2)(g). The assessee in turn, as evident from information in Form 3CEB, is controlled, by way of equity participation, by Diageo PLC which also similarly controls other entities in the Diageo group, including the entities from which CBU has imported the raw materials. Diageo PLC thus, through the assessee a .....

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see, the CBU and Diego group entities from which raw materials were purchased by the CBU. In any case, since the costs of all the raw materials is picked up by the assessee for all effective purposes. the transaction is actually between the assessee and the Diageo group concerns supplying the raw material to the CBU, and since the assessee as also these vendors are admittedly under the control of Diageo PLC, the transactions are clearly between the associated enterprises The objection raised by .....

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the requirement of one enterprise participate directly or indirectly or through one or more intermediaries inter alia in the management of the other enterprise as per clause (a) & (b) of s.s. (1) of section 92A. The assessee has given the position of the Directors and shareholders of the assessee and Kaybee Exim Pte Limited, Singapore during the financial year 2007-08 relevant to the assessment year under consideration at page 97 of the paper book as under:- Directors Kaybee India Pvt. Ltd. .....

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ovind Karunakaran is a Director in the assessee company and also a Director in Kaybee Exim Pte Limited, Singapore. He is also holding 99.9% of shareholding in the assessee company. The A.O. has recorded the facts regarding the position of the Management/Director in the Kaybee Exim Pte Limited, Singapore as under:- Sr No. Name (as per ROC filing) Date of appointment (as per filing) Designation in Kaybee Pvt. Ltd (as per ROC filing) Designation in Grupokaybee as www.kaybeegroup Shri Vikram Kumar C .....

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r. Govind Karunakaran is not only participates in management of both the companies by he is holding the key position in the management of Kaybee Exim Pte Limited, Singapore and is part of decision making process of the said company since 1996. Shri Govind Karunakaran is a common director in both the company and participating in the management of both the companies not for the name sake but he is holding the key position in taking decision being a Chief Operating Officer of Kaybee Exim Pte Limite .....

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vice charges/commission received by the assessee in respect of procurement of yarn on behalf of Kaybee Exim Pte Limited, Singapore (AE). 10. During the year under consideration, the assessee has received service charges/commission from Kaybee Exim Pte Limited, Singapore (AE) qua purchase of fabrics and yarn on behalf of AE. The assessee received 2% commission towards purchase of fabric/taxtile and .75% towards purchase of yarn. The A.O. has accepted the commission @ 2% received by the assessee t .....

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for procurement of yarn is ranging from 0.5% to 0.75%.In support of the claim, the assessee has submitted a certificate/letter issued by the Shree Solapur Yarn Merchant Association. Since this letter was produced for the first time before the ld. CIT(A), therefore, the ld. CIT(A) issued a remand order and asked the A.O. to submit the remand report. The A.O. objected for the admission of the additional evidence. The ld. CIT(A), though, admitted the additional evidence, however, did not accept the .....

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s confirmed in the said letter were prevailing in the assessment year under consideration. He has further submitted that to clarify this, the assessee has now submitted a fresh letter issued by Shree Solapur Yarn Merchant Association on 8.1.2015 wherein it has been confirmed that the rate of brokerage was prevalent during the F.Y. 2007-08. Thus, the ld. Sr. counsel for the assessee has pleaded that this letter can be admitted as additional evidence in support of the claim of the assessee. He has .....

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ot furnished the relevant record and TP study analysis, therefore, the A.O. had no option but to estimate the arm s length price. He has relied upon the orders of authorities below. 13. We have considered the rival submissions as well as the material placed on record. The arm s length price in relation to an international transaction shall be determined by any of the method prescribed u/s 92C of the Act, therefore, in order to determine the arm s length price, the comparable uncontrolled price h .....

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uncontrolled price or transaction but it was a controlled transaction between related parties. Hence, the arm s length price adopted by the A.O. is not sustainable as per the provisions of the Act. Accordingly, we set aside the orders of the authorities below in respect of adopting the arm s length commission towards procurement of yarn and remit the issue to the record of the A.O. for determination of the same afresh as per law after considering the additional evidence filed by the assessee. N .....

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the liability of the assessee as per the agreement between the owner and the assessee. The A.O. has also relied upon the order of the CIT(A) for A.Y. 2004-05 wherein a similar disallowance was made. The assessee though challenged the action of the A.O. before the ld. CIT(A) but could not succeed. 16. Before us, the ld. Sr. counsel for the assessee has submitted that the amount of property tax and society charges is an allowable deduction u/s 37(1) of the Act because the same are paid by the ase .....

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g the fact that the expenditure for filing the appeal before the Tribunal would have been much more than the tax liability on the said amount of disallowance on account of property tax and society charges. He has further contended that when the assessee has disputed the disallowance even for the A.Y. 2004-05 but the same was confirmed by the ld. CIT(A) would not operate as res judicata for the year under consideration. He has relied upon the decision of the Hon ble Supreme Court in the case of S .....

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