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2015 (9) TMI 801 - ITAT DELHI

2015 (9) TMI 801 - ITAT DELHI - TMI - Transfer pricing adjustment - selection of comparable - Held that:- British Metal Corpn. Indian Pvt. Ltd. company is engaged in providing agency services in non-ferrous metals, fertilizers and cooking coal etc. In our considered opinion, the nature of services rendered by this company is entirely different and cannot be considered as a comparable. Moreover, the appellant received fixed fee from its AE. Therefore, we direct that this company be omitted from t .....

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ansaction in question.

PL Worldways Ltd. company earns commission from air ticket sold and also transactional fees from its customer for sale of holiday packages. This function is totally different from the functions carried out by the appellant and therefore, this company should be excluded for the purposes of comparison while determine the armís length price of the international transaction in question.

Publicity Society of India Ltd. company engaged in the business of pu .....

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has to be formed by the Assessing Officer based on the material evidence available on the record. The Assessing Officer is duty bound to bring on record the comparable fair market value of the services rendered to say that the value paid by the assessee is excessive or unreasonable. We find no evidence on record to notice that the Assessing Officer made efforts in this direction. He simply made disallowance based on the surmises and conjectures. See Commissioner of Income-Tax, West Bengal Versus .....

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and upheld the adjustment by holding that there was paucity of time so as to verify the AIR of Citi Bank. We are of the considered opinion that the interest of justice would be met, if the matter is restored to the file of the Assessing Officer for fresh adjudication in accordance with law. Accordingly, this ground of appeal is restored to the file of the Assessing Officer.- Decided in favour of assessee for statistical purposes.

Comparable Killick Agencies Marketing Ltd. and Cox and .....

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CA For The Department : Shri R.K. Jha, Addl. CIT,DR ORDER PER INTURI RAMA RAO, AM These are cross appeals filed by assessee-company as well as by the Revenue directed against the order of the assessment passed u/s 143(3) read with section 144C of the Income-tax Act, 1961 for the assessment year 2009- 10. The assessee-company raised the following grounds of appeal in ITA No. 2449/Del/2014:- 1. That the assessing officer erred on facts and in law in determining the income of the appellant at ͅ .....

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essing officer/DRP erred on facts and in law in recharacterizing the transaction of provision of marketing support services undertaken by the appellant as commission agent services, by misinterpreting the following clauses of the agreement: (i) The assessee is under no obligation to increase the turnover of its AE. (ii) The assessee shall not be responsible for acting as mediator between its foreign AE and its customers. (iii) There is no responsibility towards the customer neither there is any .....

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limited to: (i) Promotion of AEs products in the India (ii) Providing information on any business opportunities that AEs may have in the India in relation to its products. 2.3 That the assessing officer/ORP erred on facts and in law in recharacterizing the transaction of provision of marketing support services as commission agent services, merely on the premise that the appellant is receiving fixed percentage of service fee on the FOB value of invoices raised by the AE on the customers in India. .....

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her costs to this segment. 2.6 That the assessing officer/ORP erred on facts and in law in undertaking a fresh search of comparable companies engaged in the business of providing commission agent services and thereby rejected the benchmarking analysis undertaken by the appellant in its transfer pricing document considering companies engaged in providing marketing support services. 2.7 That the assessing officer/ ORP erred on facts and in law in considering Priya International Limited having abno .....

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ent, in the final set of comparable companies. 2.9 That the assessing officer/ DRP erred on facts and in law in considering Publicity Society of India Ltd. and P L Worldways Ltd. which are functionally not comparable and are showing abnormally high profit margin in the relevant segment, in the final set of comparable companies. 2.10 That the assessing officer/ DRP erred on facts and in law in considering British Metal Corpn. India Private Limited, Priya International Limited and Publicity Societ .....

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ia Ltd. (Seg.) 71.17% 37.14% 3. That the assessing officer/DRP erred on facts and in law in making an ad- hoc disallowance of 50% of the professional fees of ₹ 60,29,221 paid by the appellant to Metso Minerals (Mumbai) Private Limited ('Metso Mumbai') invoking section 40A(2)(a) of the Act. 3.1 That the assessing officer/DRP erred on facts and in law in making arbitrarily disallowance of 50 percent of the professional fees paid to Metso Mumbai without giving any cogent basis and on .....

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services to its related parties. Accordingly, there is rationale to receive such services from Metso Mumbai. (iv) The rates agreed between the parties may not be at arms length price as the services are rendered to group companies. 3.3 That the assessing officer/ORP erred on facts and in law in concluding that the professional charges paid by the appellant to Metso Mumbai is a mechanism to divert income to Metso Mumbai as it is incurring losses for last several years. 3.4 That the assessing off .....

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fair market value of such design and drawing services availed by the appellant. 3.6 Without prejudice, the assessing officer/ORP erred on facts and in law in not appearing that the profit earned by the appellant in its manufacturing segment were considered to be at arms length price by the TPO and accordingly, there could not be a case of shifting of profits by the appellant to Metso Mumbai by way of payment of professional fees. 4. That the assessing officer erred on facts and in law in making .....

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ted the facts of the case are that the appellant [Mesto Minerals (India) Pvt. Ltd.] is a company incorporated under the provisions of the Companies Act, 1956. It is engaged in the business of manufacturing and trading of mineral processing equipment. The return of income for the assessment year 2009-10 was filed on 27th September, 2009, disclosing taxable income of ₹ 10,73,56,150/-. The case was selected for scrutiny assessment. Since the appellant reported international transaction in its .....

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the price charged by it for the service rendered to its AE was at arm s length, the appellant filed a report in Form 3CEB as required under the provisions of Section 92E of the Act. The appellant also made a detailed analysis of international transactions. The appellant had adopted transactional net margin method (TNMM) as the most appropriate method for determining the arm s length price. The operating profits to total cost was adopted as the profit level indicate ( PLI ). In the transfer prici .....

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Asia Leisure Services 1.43% 10. Kerala Travels Interserve 7.84% 11. Mid Day Multimedia -1.05% 12. Overseas Development & Employmen Promotion Consultants Limited 7.21% 13. Pearl International Tours & Travels 4.06% 14. Shrayans Resources 3.33% 15. Times Innovative Media Limited 0.37% 16. Trade Wings Limited 15.61 % 17. Travel Corporation (India) Ltd.- 20.15% Arithmetic Mean 5.82% 5. The appellant claimed that since the margin for marketing supportive services segment was at 10.23% in its .....

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was based on written agreement between them. The sale in the US segment increased in the year under consideration from 9.02 crores to 23.09 crores. But the assessee instead of showing the commission @ 10% reported only a commission of ₹ 1.15 crores i.e. @ of 5%. It can be seen that as the parties were related to each other therefore they opted to reduce the commission as a mutual arrangement so that the assessee does not have to pay taxes on the increased commission. As a matter of conven .....

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td. (seg) 29.24% 2. ' P LWorldways Ltd. 39.60% 3. Publicity Societyof India Ltd. (seg) 71.17% 4. Cox & Kings 69.81% 5. ICC International Agencies Limited 11.83% 6. British Metal Corporation (India) 62.96% 7. Priya International Limited (Indenting Segment) 82.19% Arithmetic mean 52.40% Accordingly, the TPO vide his order dated 8th January, 2013 passed an order under section 92CA(3) of the Act determining the arm s length price at ₹ 5,87,64,787/-. Subsequently, this order was rectifi .....

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ution Panel. The Dispute Resolution Panel ( DRP ) vide order dated 26.12.2013 directed the TPO to exclude Killick Agencies & Marketing Ltd. And Cox & Kings as these companies had substantially high related party transactions. Accordingly, the Assessing Officer passed final assessment order dated 28th February, 2014 making upward adjustment of on account of Transfer Pricing of ₹ 4,85,04,301/-; for profession fees paid to Metso Minerals (Mumbai) Pvt. Ltd. of ₹ 30,14,610/- and f .....

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ctivities are not undertaken for agency/ marketing support function. Further, in the market support segment the appellant neither performs any function related to inventory management nor assume inventory risk. Hence, selling and administration costs should ideally be split in gross margin ratio and not in the ratio of sales. It would be appreciated that the allocation of expenses at gross margin level provides a level playing field for the two activities, viz., distribution and commission/ mark .....

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t was submitted that if the allocation of expenses in proportion of the gross margin is done, it results in allocation of only ₹ 2,71,47,935 towards agency/marketing support service activity and OP/OC ratio of the commission/marketing support segment at 354.58%. Without prejudice, it was submitted that if the expenses are allocated in the proportion of gross margins, the transfer pricing adjustment in respect of agency service functions and marketing service functions taking OPITC of compa .....

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It is clear from the above working, after making the correct allocation of expenses, the value of international transaction from marketing support services at ₹ 12,34,09,807 is more than the arm's length price at ₹ 4,16,85,654 (after taking into consideration the OP/OC of the comparables at 53.55%) as determined by TPO. In view of the above, it was submitted that if the segmental profitability computed after allocation of expenses in the proportion of Gross Profit then the intern .....

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hout ascribing any reason. In this connection, he placed reliance on the decision of Hon ble Jurisdictional High Court in the case of Li & Fund India (P) Ltd.: 361 ITR 85, before this Hon'ble Court, the assessee adopted TNMM and computed PLI at operating profit margin/total cost. The Hon'ble Delhi High Court, held that where all elements of a proper TNMM were detailed and disclosed in the assessee s study reports, care ought to be taken by the tax administrators and authorities to an .....

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ined in accordance with the Act. Further, he submitted that the comparables selected by the TPO are functionally not comparable with the appellant and the TPO has erroneously selected the companies earning commission income. According to the learned counsel, the following companies selected by the TPO should be rejected: S.No Company Name Reasons for rejections 1. British Metal Corpn India Private Limited The company provides agency services for non-ferrous metals,' precious. metals, fertili .....

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the provision of marketing . support services in the heavy machinery business. Further, in the annual report of the company- there is an unallocated segment for which complete details are not available. 3. PL Worldways Limited The company provides a wide gamut of travel related services viz. Corporate travel solutions, holiday travel, event management, conferences, cruises and air charters, which are entirely different from the marketing support services rendered by the appellant. As per the ann .....

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in which is a major source of revenue through its e-advertisement initiatives. As the majority of income comprises of advertisement revenue and sale from newspaper, the company is not functionally comparable to the marketing support services rendered by the appellant. After removing the above companies, average operating profit margin of the final list of comparable companies with an 11.83% as under: Sl. No. Company Name OP/TC 1. ICC International Agencies Ltd. 11.83% Arithmetic mean 11.83% Ther .....

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ted that the Transfer Pricing Officer in the assessee s own case for the all the preceding assessment years and successive years has accepted the benchmarking analysis of international transaction of provision of marketing support services applying TNMM method. The comparable selected by the appellant in its transfer pricing study for the FY 2008-09 (AY2009-10) have either been accepted by that TPO in the financial year 2009-10 (AY 2010-11) or FY 2007-08 (AY 2008-09). The list of the comparables .....

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rala Travels Interserve Ltd. 8.54 7.84 Not in base set 11. Mid Day Multimedia Ltd. -5.08 -1.05 Not in base set 12. Officer Care Services Ltd. 4.72 13. Overseas Development & Employment Promotion Consultants Ltd. 9.88 7.21 Persistent losses during FY 2006 and 2007 14. Pearl International Tours and Travels Ltd. -3.28 4.06 2.91 15. Sharyans Resourses Ltd. 3.21 3.33 Different business profile Financial Service prove 16. Trade Wings Ltd. 17.36 15.61 8.52 17. Travel Corporation(India) Ltd. 22.58 2 .....

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m the above table it would be· appreciated that the comparables selected in the transfer pricing documentation in FY 2008-09 are accepted by the TPO in the previous and successive years. Hence the rejection of the benchmarking done by the appellant is arbitrary and without any cogent reasons. It is submitted that the appellant is in the same business for a number of years and the methodology used for benchrnarking the international transaction has been consistently followed from year to y .....

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hat the Hon'ble Supreme ourt has clearly laid down that where a fundamental aspect permeating through the different assessment years have been found as a fact one way or the ther, and the parties have allowed the position to be sustained by not challenging the order, it is not allowed to change the position in any subsequent year. The Supreme Court in Radhasoami Satsang vs. CIT (193 ITR 321) has clearly laid down the above rule of law by making the following observation: "One of the con .....

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ssed the following opinion (p.242). The principle to be deduced from these two cases is that where the question relating to assessment does not vary with the income every year but depends on the nature of the property or any other question on which the rights of the parties to be taxed are based, e.g., whether a certain property is trust property or not, it has nothing to do with the fluctuations in the income; such questions, if decided by a court on a reference made to it would be res judicata .....

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72. The Assessee in its submission has stated that TPO has accepted the bench marking analysis of the Assessee in immediately preceding year (i.e. AY 2006-07) and immediately succeeding year (AY 2008-09) and has not drawn any adverse inference with regard to the international transaction pertaining to CVPS distribution business ... xxx ... 73. We have considered the submission of both the parties and find considerable force in arguments of Ld. Counsel for the Assessee that there being no change .....

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s to be brought on record to draw the adverse inference . Name of the Company Margin considered by TPO Actual margin P L Worldways Ltd. 39.60% 4.52% Publicity Society of India Ltd. (seg) 71.17% 37.14% Reliance is also placed on the following judgements in which principle of consistency was affirmed by the various courts: - Lloyds TSB Global Services Private Limited (ITA No. 5928/Mum/2012) - Brintons Carpets Asia P Ltd. (ITA No. 296/PN/10) - ARJ Security Printers (264 ITR 276) - Deutsche Asset Ma .....

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ct Margin (OP/OC) of the comparables companies: The TPO vide its order has considered incorrect margin of the following companies in the comparable set: Name of the comparables companies Incorrect margin Correct margin PL Worldways Limited 39.60% 4.52% Publicity Society of India Limited 71.17% 37.14% The appellant pointed out the above computational error before the TPO and DRP and the same was not accepted or considered by them without giving any reason. After considering the correct margins th .....

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tment in the AO order Adjustment after correct margin as per appellant Operating cost of the assessee (as per TP Order) 111,959,693 111,959,693 Arm s length margin- OP/OC 53.55% 39.73% Arm s length price (A) 171,914,109 171,914,109 Price shown in international transaction (B) 123,409,807 123,409,807 Transfer Pricing adjustment 48,504,302 33,029,233 Without prejudice, Transfer Pricing adjustment, to be sustained, if any, should be restricted to ₹ 3,30,29,233. On the other hand, learned Sr. .....

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recious metals, fertilizers, and cooking coal and whereas the appellant provides market supporting services for which it earns commission in respect of equipment for minerals and rock processing. The appellant also brought on record the details to demonstrate the nature of business carried on by this company. It is clear from the page nos. 695 & 696 of the paper book that this company is engaged in providing agency services in non-ferrous metals, fertilizers and cooking coal etc. In our cons .....

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en from the record that the Transfer Pricing Officer included this company in the final set of comparables selected by him. The appellant brought on record substantial factual evidence to establish that this company is functionally dissimilar and different from the appellant and therefore is not comparable. It is evident from page no. 740 to 743 of the paper book that this company is engaged in the provision of commissioning agency and trading of chemicals. This function is totally different fro .....

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appellant and therefore, this company should be excluded for the purposes of comparison while determine the arm s length price of the international transaction in question. (iv) Publicity Society of India Ltd. This company was selected as comparable by the Transfer Pricing Officer. It is contended that this company cannot be included in the list of comparables as it is engaged in the business of publication of news papers and publications. To demonstrate this fact, the appellant had filed the a .....

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e appellant would well within + 5 per cent range of the arithmetic mean of the remaining comparables companies and therefore the price received by the appellant would be considered as at arm s length. He prayed for a limited direction to the Transfer Pricing Officer on the lines set out above and determine the arm s length price. It also submitted that the other issues raised by the appellant in the grounds of appeal need not be gone into. 8.2 We are of the view that the prayer sought for by lea .....

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the Act are as follows: During the previous year relevant to the AY 2009-10, the appellant made payment to its subsidiary M/s Metso Minerals (Mumbai) Private Limited ("Metso Mumbai") amounting to ₹ 60,29,221 towards drawings, design & engineering services. The appellant, during the year has also received payment of ₹ 9,67,387 for similar services rendered to Metso Mumbai. The assessing officer, in the impugned order, disallowed 50% of the aforesaid payment made by the .....

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urnished any comparable case which would show that the rates are as per prevailing market rates; (v) Professional services have been rendered to Metso Mumbai and other third parties in spite of tight delivery schedules. It is submitted before us that the aforesaid disallowance made by the assessing officer is without appreciating the following underlying facts of the case of the appellant and the need for receiving services from Metso India: (i) The appellant, under its project engineering segme .....

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te some part of the" design and drawing work to outside agency, on requirement basis. This is also required to avoid penalties/damages claimed by the customers on delay in delivery of goods and services. (iii) Since Metso Mumbai has requisite expertise to render such services on time to time basis with fundamental quality of goods and services, it is incumbent upon the appellant to engage Metso Mumbai for rendering such services. (iv) Further, since Metso Mumbai is group entity of the appel .....

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ts for which the appellant company has rendered services to Metso Mumbai; 4) Copy of invoices raise by the appellant for rendition of services to Metso Mumbai; 5) Details of the qualified engineers of the both companies who have rendered the professional work of engineering and designing services. The DRP vide its order dated 26.12.2013 rejected the objection of the appellant against the addition made by the assessing officer allegedly holding that the rate of payment made by appellant against s .....

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c. (1967) 65 ITR 381 - J K Woollen Manufacturers v. CIT: 72 ITR 612(SC) - CIT v. Birla Cotton Spg. And Wvg. Mills: 82 ITR 166 (SC) - Madhav Prasad Jatia v. CIT UP, 118 ITR 200 (SC) - S. A. Builders Ltd. vs. CIT : 288 ITR 1 (SC) - CIT v. Rockman Cycle Industries Ltd.: 331 ITR 401 (P&H) (FB) - CIT v. Bharti Televentures Ltd: 331 ITR 502 (Del) - CIT vs. EKL Appliances Ltd. : ITA No. 1068/2011 & 1070/2011 (Del HC) It was further submitted that for invoking the provisions of section 40A(2) of .....

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TR 105 (Guj.) - CIT v. Aditya Medisales Ltd.: ITA No. 559/2009 (Guj.) - CIT v. Gopala Polyp last Ltd. : ITA NO. 26512009 (Guj.) - JCIT v. ITC Ltd.: 112 ITD 57 (Kol.)(SB) - Jagdamba Rollers Flour Mill Ltd. vs ACIT: 117 ITD 260(TM) (Nag.) - Aradhana Beverages & Foods Co. (P.) Ltd vs. DCIT:51 SOT 426 (Del) - S.K. Engg vs. JCIT: 103 ITD 97 (Bang.) - Rangoon Chemical Works (P) Limited: 100 Taxman163 (Ahd.) (Mag) - Kinetic Honda Motor Ltd V. JCIT 77 ITD 393 - Shyam Oil Cake Ltd V. ACIT: 83 TTJ 414 .....

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lue'. Reliance in this regard is also placed on the decision of the Hon'ble Tribunal in the appellant's own case for assessment year 2007-08 (ITA No 4414/Del/2012) wherein the Hon'ble Tribunal while deleting similar addition made by the assessing officer held as under: "12. In view of the foregoing reasons, we are of the considered opinion that the case of the assessee does not fall in any of the three situations contemplated by section 40A(2)(a) of the Act. Once a payment i .....

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bai made by the assessing officer may be directed to be deleted. 10. On the other hand, the ld. Senior DR has relied on the orders of the lower authorities. 11. We heard the rival submissions and perused the material on record. It appears from the assessment order that the Assessing Officer had disallowed the impugned payment to its sister concern merely guided by the fact that the appellant had been incurring losses and also placed reliance on the decision of Hon ble Gujarat High Court in the c .....

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ard to (a) fair market value of the goods, services or facilities for which the payment is made; or (b) the legitimate needs of the business of the assessee; or (c) the benefits derived by or accruing to the assessee on receipt of such goods, services or facilities, then the Assessing Officer shall not allow as a deduction so much of the expenditure as is so considered by the Assessing Officer to be excessive or unreasonable. Therefore, it becomes apparent that the Assessing Officer is required .....

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cer made efforts in this direction. He simply made disallowance based on the surmises and conjectures. 12. We may also refer to the scope of Section 40A(2) as explained by the CBDT in Circular No. 6P, dated 06.07.1968. The CBDT clarified that while examining the reasonableness of expenditure the Assessing Officer is expected to exercise his judgment in a reasonable and fair manner. It should be borne in mind that the provision is meant to check evasion of tax through excessive or unreasonable pa .....

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eration (i) the legitimate business needs of the company and (ii) the benefit derived by or accruing to the company. The legitimate business needs of the company must be judged from the view point of the company itself and must be viewed from the point of view of a prudent businessman. It is not for the Assessing Officer to dictate what the business needs of the company should be and he is only to judge the legitimacy of the business needs of the company from the point of view of a prudent busin .....

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in business. 14. The aforesaid judgement of Calcutta High Court was affirmed by the Apex Court in CIT Vs. Edward Keventer (P.) Ltd. [1978] 115 ITR 149. In the same line is the judgment of Bombay High Court in the case of CIT Vs. Shtrunjay Diamonds [2003] 261 ITR 258/128, Taxmann, 759. 15. In the light of aforesaid legal position, we hold that 50% of professional charges paid to M/s Metso Minerals (Mumbai) Private Limited cannot be disallowed and accordingly these grounds of appeal are allowed. 1 .....

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ion was recorded in the books of accounts of the appellant, the appellant sought information from Citi Bank. However, Citi Bank directed the appellant to sought information from the assessing officer. 16.2 Further, the AIR furnished by Citi Bank was also in the name of Vijay Dhar whose address is stated to be that of the appellant. The appellant requested Citi Bank as well as assessing officer to furnish the relevant details, however, both did not accepted the request and did not furnish any det .....

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A 0 has not established that entries are not recorded in books of accounts. In the view of this, DRP directs the AO to furnish detail of entries regarding credit card transaction to the assessee and then decide upon its taxability U/S 69C of the Act. The objection is disposed of accordingly. " The assessing officer while passing the final order dated 28.02.2014 did not followed the direction of the DRP and did not re-verified the AIR of the Citi Bank and upheld the adjustment of ₹ 207 .....

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see. It is the responsibility of A O to examine complete details before asking for reconciliation and whether the transactions were indeed undertaken or not. The AIR report also does not contain any authentication but since it is generated by the Department, credit was given by AO and DRP 'about its authenticity. Assessee after obtaining the details and making efforts to reconcile filed the documents on record duly certified as 'true copy' before the DRP. What further authentication .....

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and in the eye of law. The assessee is also directed to co-operate with the proceedings by promptly producing the relevant documents and books of account required by the Id. AO .. Since the grounds raised by the Revenue and CO by the assessee pertains to the same issue, the delay in filing the CO is condoned and admitted for hearing. " In the light of the above arguments, it is submitted that adjustment made by the assessing officer on account of credit card transaction may be deleted. 16.4 .....

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, namely Killick Agencies Marketing Ltd. and Cox and Kings (India) Ltd. The Hon ble DRP rejected these two comparables applying the filter of related party transactions. Indisputably, Killick Agencies Marketing Ltd. had 64.12% and M/s Cox and Kings (India) Ltd. had 109.9% of related party transactions. In view of the fact that these comparables had high percentage of related party transactions, the Hon ble DRP had rejected the same as comparables. 18. Section 92 provides that the income arising .....

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