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Liquid Controls India (P) Ltd. Versus ACIT, Circle-1 (2) , Baroda.

2016 (12) TMI 454 - ITAT AHMEDABAD

Deduction u/s 80IB disallowed for interest income on fixed deposit given as margin money towards loan/limit taken from the bank - Held that:- Assessee has not substantiated his claim along with necessary evidences in order to demonstrate that interest income earned on fixed deposit are with regard to margin money. We are, therefore, of the view that the issue needs to be restored to the file of Assessing Officer to carry out necessary verification with the support of documentary evidences to be .....

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ction? - Held that:- Net amount is to be excluded from the profits for the purpose of computation of deduction u/s 80IB. See M/s ACG Associated Capsules Pvt. Ltd. [2012 (2) TMI 101 - SUPREME COURT OF INDIA ] - Transfer pricing adjustment - ALP - applying operating profit margin being average of comparables selected - whetehr adjustment arising out of the Arm's Length Price (ALP) is to be restricted to only International Transactions with the Associated Enterprise instead of entire turnover o .....

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ainst this ld. Assessing Officer made addition to the returned income of assessee by applying 7.27% operating profit margin being average of comparables selected by him which was sustained to 5.78% by ld. CIT(A). From going through these figures we find that the difference of operating profit margin at which the international transaction has actually been undertaken as against arm’s length price determined by Assessing Officer is within tolerance range of (±) 5% as provided in proviso to section .....

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ing Officer to justify the disallowance and to prove that remuneration paid to MD was excessive or unreasonable. We, therefore, set aside the order of ld. CIT(A) and allow the ground of assessee. - ITA No. 79/Ahd/2010 - Dated:- 21-11-2016 - Shri S.S. Godara, JM And Shri Manish Borad, AM Appellant by Shri Sanjay R. Shah, AR Respondent by Shri S. K. Dev, Sr.DR ORDER This appeal of assessee is directed against the order of ld. CIT(A)-V, Baroda, dated 30.10.2009 in appeal No.CAB(A)-V/86/07-08 passed .....

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at ₹ 12,55,363. Subsequently, notice u/s 148 was issued along with reasons against which assessee filed letter dated 1.12.2006 stating that the original return filed on 31.10.2002 be treated as return filed in response to notice u/s 148 of the Act. Accordingly re-assessment u/s 143(3) r.w.s. 147 of the Act was finalized on 31.12.2007 at ₹ 94,33,166/- after making addition of ₹ 21,78,003/- to the previously assessed income u/s 143(3) r.w.s. 148 of the Act on 31.3.2006. 3. In ap .....

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61 and completing the assessment, commenced under invalid and improper exercise of powers u/s 147 of the Act. 5. Ground no 2. Reads as follows :- 2. The learned CIT (A) erred in fact and in law in confirming the action of the AO in holding that the following items of income are not derived from industrial undertaking and therefore the Appellant is not entitled to deduction under 80IB on these items of income: Particular Amount Interest on Margin Money Deposit 6,56,890 Total 6,56,890 6. At the ou .....

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s made by ld. AR. 8. We have heard the rival contentions and perused the record placed before us. Through this ground assessee has challenged the order of ld. CIT(A) confirming the order of Assessing Officer in not allowing deduction u/s 80IB of the Act for interest income on fixed deposit given as margin money towards loan/limit taken from the bank. Before going further it will be relevant to go through the finding of ld. CIT(A) wherein he has observed as follows :- 5.4 I have carefully conside .....

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trial undertaking as is referred to in section 33B, in the circumstances and within the period specified in that section; (it) it is not formed by the transfer to a new business of machinery or plant previously used for any purpose. (ill) It manufactures or produces any article or thing, not being any article or thing specified in the list in the Eleventh Schedule, or operates one or more cold storage plat or plants, in any part of India: Provided that the condition in this clause shall, in rela .....

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namely:- (a) such machinery or plant was not, at any time previous to the date of the installation by the assessee, used in India; (b) such machinery or plant Is Imported into India from any country outside India; and (c) no deduction on account of depreciation in respect of such machinery or plant has been allowed or is allowable under the provisions of this Act in computing the total income of any person for any period prior to the date of the installation of the machinery or plant by the asse .....

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the industrial undertaking manufacturers or produces articles or things, the undertaking employs ten or more workers in a manufacturing process carried on with the aid of power, or employs twenty or more workers in a manufacturing process carried on without the aid of power, " ; 5,4.1. Apparently the AO has disallowed the claim u/s. 80IB on the ground that no primary evidence had been furnished to justify the manufacturing activity. During the course of spot verification at the business pre .....

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raw material consumed is also indicated. Further, the statement before the Central Excise reveals that the manufacturing activity was going on during the assessment year. As against the aforesaid details the AO has not led any positive evidence to support his argument that no manufacturing activity was carried out. His arguments that the value of plant & machinery is too low is not firmly founded as he referred to WDV and not the historical cost of plant & machinery, inaccuracy has also .....

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was corresponding entries on the debit side of the P & L Account. Similarly dividend income and interest Income has to be excluded for the purpose of Section 80IB. I am also partly in agreement with AO that there was some trading activities as mentioned in the Audit Report. The assessee Is asked to provide all necessary details for clear bifurcation of trading and manufacturing activities with attendant details of income and allocable expenses, so that only the manufacturing profits are all .....

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arry out necessary verification to calculate the profits attributable to the manufacturing activities only which are eligible for deduction u/s 80IB of the Act. As regards the claim of assessee for allowing deduction u/s 80IB for interest on fixed deposit given as margin money towards secured/credit from bank we observe that to the extent if the interest is from such fixed deposit which have been used to get the working limits from bank, judgment of Hon. Bombay High Court in the case of CIT vs. .....

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are with regard to margin money. We are, therefore, of the view that the issue needs to be restored to the file of Assessing Officer to carry out necessary verification with the support of documentary evidences to be provided by assessee in order to prove that fixed deposits on which interest income has been shown are linked with margin money in order to enjoy secured loan/credit limits from banks. Needless to mention that proper opportunity of being heard may be given to the assessee. According .....

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see by the judgment of Hon. Supreme Court in the case of ACG Associated Capsules (P) Ltd. vs. CIT (2012) 18 taxmann.com 137 (SC) wherein it has been held that net amount of interest only and not gross amount should be excluded from the profits for the purpose of calculating deduction u/s 80IB of the Act. 12. Ld. DR on the other hand relied on the orders of lower authorities but could not controvert the submissions made by ld. AR. 13. We have heard the rival contentions and perused the material o .....

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uded from the profits for the purpose of calculating deduction u/s 80IB of the Act. We find that Hon. Supreme Court in the case of ACG Associated Capsules (P) Ltd. vs. CIT (supra) while adjudicating the issue relating to deduction u/s 80HHC has held as follows :- Explanation (baa) to section 80 HHC states that 'profits of the business' means the profits of the business as computed under the head 'Profits and Gains of Business or Profession' as reduced by the receipts of the natur .....

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ich are allowable under sections 30 to 44D have to be allowed as expenses. After including such receipts of income and after deducting such expenses, the total of the net receipts are profits of the business of the assessee computed under the head 'Profits and gains of business or Profession1 from which deductions are to made under clauses (I) and (2) o/Explanation (baa). [Para 9] Under clause (I) o/Explanation (baa), ninety per cent of any receipts by way of brokerage, commission, interest, .....

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r the head 'Profits and Gains of Business or Profession'. Therefore, if any quantum of the receipts by way of brokerage, commission, interest, rent, charges or any other receipt of a similar nature is allowed as expenses under sections 30 to 44D and is not included in the profits of business as computed under the head 'Profits and Gains of Business or Profession', ninety per cent of such quantum of receipts cannot be reduced under clause (1) o/Explanation (baa) from the profits o .....

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ceipts by way of brokerage, commission, interest, rent, charges or any other receipt of a similar nature included in such profits' will not only refer to the nature of receipts but also the quantum of receipts included in the profits of the business as computed under the head 'Profits and Gains of Business or Profession' referred to in the first part of the Explanation (baa). Accordingly, if any quantum of any receipt of the nature mentioned in clause (1) o/Explanation (baa) has not .....

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sections 30 to 44D and is not to be included in the profits of the business of the assessee as computed under the head "Profits and Gains of Business or Profession", ninety per cent of such quantum of the receipt of rent or interest will not be deducted under clause (1) o/Explanation (baa) to section 80HHC. In other words, ninety per cent of not the gross rent or gross interest but only the net interest or net rent, which has been included in the profits of business of the assessee as .....

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. Supreme Court in the above referred case, we are of the view that net amount is to be excluded from the profits for the purpose of computation of deduction u/s 80IB. Accordingly, this ground of assessee is allowed. 15. Ground no.4 of the appeal reads as under :- 4. The learned C1T(A) erred in fact and in law in confirming ihe action ol the AO in making adjustment u/s. 92C r.w.s 92(1) in respect of international transactions and thus confirming addition to the extent of ₹ 15,28,587. 4.1 T .....

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39;s length price completely ignoring provisions of section 92C(3) of the Act. (iv) in rejecting the comparable cases without giving proper reasons for such rejection. 4.2 The learned CIT(A) erred in fact and in law in stating that the appellant has not challenged the inclusion of Daniel Measurements and Control India Ltd. in the list of comparables while working out the comparable operating margin. 4.3 The learned CIT(A) erred in fact and in law in determining the comparable operating margin at .....

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the AO not to make any addition despite the fact that the arm s, length price as worked out by the AO and that worked out by the appellant did not exceed the limit of 5 % as stated in proviso to section 92C(2). 16. Brief facts in relation to this ground are that assessee entered into international transaction covered by section 92B of the Act which is supported by report in form 3CEB r.w.s.92E of the Act, As per this report assessee entered into international transaction with its Associated Ente .....

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rse of assessment proceedings assessee submitted a report on transfer pricing study of LCIPL for FY 2001-02 discussing the details relating to the scope of this study, summary of approach, frame work of transfer pricing regulations, over view of the AE, company overview, industry scenario, functional analysis-objective, functions performed, risks assumed, assets employed, economic analysis and conclusion. As per the reply of assessee dated 16.3.2006 in which assessee has given the basis of selec .....

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e operating margin profit (O.P./sales) at 3.73% as against average of operating profit margin of comparable companies at (-) 1.95%) and it was claimed by assessee that no adjustment is required to be made for determining the arms length price (ALP) of the various international transaction (I.T.). Thereafter ld. Assessing Officer confronted assessee as to why not the international transaction should be adjusted to have an operating profit/sales margin at 7.27% which is an average of Daniel Measur .....

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use notice for adjusting international transaction at 7.27% assessee objected the observation of Assessing Officer for not providing working on the basis of which operating margin has been calculated and also objected that Bhartia Industries Ltd., Indfos Industries Ltd. and Roop Telsonic Ultrasonix Ltd. were engaged in manufacturing of items other than those dealt by the assessee. However, Assessing Officer disregarded to the contention of assessee by observing that the list of comparables were .....

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ee is engaged in both the manufacturing and trading activities. Accordingly the Assessing Officer applied the difference of the average operating sales ratio of 7.27% as against operating/sales ratio of 3.73% shown by the assessee and applied the difference of 3.54% [7.27% (-) 3.73%] on the total turnover of the assessee and made addition of ₹ 26,39,609/- to the arms length price u/s 92C(3) of the Act. 20. In appeal before ld. CIT(A) challenging the impugned addition of ₹ 26,39,608/- .....

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e by the AO. i. The AO has neither accepted the list of comparables as per original study nor has accepted the list as per revised study. No specific reason is given for rejecting more scientific alternate study. The AO has primarily gone by the original study and has made the following alterations in the list of the comparables: a. Excluded companies having turnover exceeding ₹ 100 crores on the ground of size, b. Excluded two companies merely on the ground that they have incurred losses, .....

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(Profit Level Indicator) works out to (-2.29%) i.e. less than what was adopted by the Appellant. ii. The AO excluded two companies i.e. Bells Controls Ltd. and Jyoti Ltd. merely because these companies are incurring losses. It Is submitted that merely because some companies are making losses does not require exclusion of a comparable case unless It is shown by explicit evidence that the losses have affected performance. Further, for working out PLI, the law requires average of the PLI of all com .....

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t he has not eliminated Bhartia Industries Ltd. (engaged in manufacturing of Motor Control Gears), Indfos Industries Ltd. (engaged in manufacturing of Hydraulic Systems and also Pressure and Temperature Controllers) and also Roop Telsonic Ultrasonlx Ltd.. (dealing in Accessories to amplifier, Ultrasonic Cleaner and also in Ultrasonic plastic welding machines.) iv. Rather than following systematic base, the AO has already adopted selective approach to identify comparables as it is revealed from w .....

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Roop Telsonic 11.75% rejected Roop Telsonic Ultrasonic Ltd. 11.75% operating margin (being much higher) and accepted the remaining three as were having the operating margin between 5.68% to 5.38% and on average took the percentage of 5.78% as against the assessee s margin of 3.73% and accordingly after applying the difference of 2.05% in the total sales sustained addition of ₹ 15,28,582/- by observing as follows :- 6.3. I have carefully considered the facts of the case and the submissions .....

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dustries Ltd., Roop Telsonic Ultrasonic Limited are dealing In completely different products and thus these companies cannot, be comparable cases on lack of functional similarity ground. It Is also pointed out by the appellant that the only company which was truly Similar to the appellant was FMC Sanmar Inds. Ltd. but it incurred tosses during the year. The AO has however, pointed out that Bhartia Industries Ltd., is engaged in manufacture of Electronic control devices and Indfos is in the busin .....

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criterias adopted by the AO for short listing the set of comparables. The companies with much higher turn over i.e. >100 crores encounter different set of risk factors and operational logistics as compared to the appellant i.e. in the range of <10 crores. Further, loss making companies also cannot be the right comparables. The appellant not questioned the inclusion of Daniel Measurements and ControLlQdla_Ltd.f in the list of comparable. On this basis the surviving set of companies are: Na .....

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% on the total sale of about ₹ 7.4565 crores is ₹ 15,28,582/- is confirmed. Ground no.6 is partly allowed. 22. Aggrieved, assessee is now in appeal before the Tribunal. 23. Ld. AR submitted that assessee company which is engaged in the business of manufacturing and sale of positive displacement mass flow meters, pumps and turbine is 100% subsidiary company of Liquid Controls Inc. incorporated in USA (LCI) and part of Idex Corporation Group which has substantial experience, know-how a .....

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performance, risks assumed, assets employment and its characterization. Submissions have also been made with regard to analysis vis-à-vis mapping of international transaction selection of most appropriate method for calculating arms length price and the reasons for applying transaction net margin method as a most appropriate method with regard to the facts of the case. 24. Ld. AR further submitted that net operating profit margin of the sales margin which was calculated by assessee at 3. .....

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g the action of Assessing Officer for applying differential net operating profit margin of total turnover rather than on international transaction. In support of his contention ld. AR relied on the following judgment/decisions :- 1. CIT vs. Ratilal Becharlal & Sons (2016) 65 taxmann.com 155 (Bombay) 2. ITA No.736/Mum/2012 for Asst. Year 2008-09 in the case of Phoenix Mecano (India) P. Ltd. vs. ITO 3. ITA No.6183/Del/2012 for Asst. Year 2008-09 in the case of Chrys Capital Investment Advisors .....

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placed at page 97 of the paper book which is as under :- Option 1 Option 2 International transaction (Rs. In crores) A 3.28 3.17 Assessee's margin (% of sales) B 3.73% 3.73% AO's margin (% of sales) C 7.27% 7.27% Difference to be added to income of assessee D=C-B 3.54% 3.54% ALP @ 103.54% (Rs. In crores) E=A+(A*D) 3.40 3.28 95% of ALP (Rs. In crores) F=E*95% 3.23 3.12 105% of ALP (Rs. In crores) G=E*105% 3.57 3.45 Value of international transaction is within range of +5% 3.28 3.17 26. O .....

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ed the record placed before us. Assessee is aggrieved with the action of ld. CIT(A) sustaining the addition of ₹ 15,28,552/- u/s 92C(3) of the Act. We do not consider to reiterate the facts discussed above, but briefly we observe that following transactions were entered into by the assessee i.e. LCIPL as its Associated Enterprise, Liquidity Control Inc (LCI), USA - i) Import of components of ₹ 10781520/- ii) Import of finished goods of ₹ 14555120/- iii) Export of fabricated ite .....

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es Bhartia Industries Ltd. 5.68% Indfos Industries Ltd. 6.28% Daniel Measurement 5.38% Roop Telsonic 11.75% When the matter came up before ld. CIT(A) out of four comparables taken by Assessing Officer, ld. CIT(A) rejected Roop Telsonic having 11.75% operative margin by taking a view that remaining three represent most probable operating and sales margin for comparable assessee s case and accordingly calculated the average ratio of 5.78%. 28. We further observe that the difference of operating pr .....

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en calculated at 4.51% by making following calculation:- Computation of Operating Margin of the Assessee: Particulars Amount (Rs.) Profit After Tax Add: Interest & Finance Charges Add: Provision for Taxation Less: Prior Period Adjustments (Net) Less: Interest Income 1,468,777 2,290,723 3,759,500 575,000 4,334,500 314,686 4,019,814 656,890 Opera ting Margini 3,362,924 Sales 74,565,221 Operating Margin (%) 4.51% 29. As against the revised operative margin of 4.51% ld. CIT(A) has upheld 5.78%. .....

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raised before the lower authorities against the inclusion of Danial Measurement Ltd. We are, therefore, of the view that to the extent of selection of comparable we upheld the decision of ld. CIT(A) for taking three companies Bhartia Industries Ltd., Indfos Industries Ltd. & Danial Measurement Ltd. having average operating profit/sales margin of 5.78%. Now the issue as to whether differential operating profit margin which is in this case is 2.05% is to be applied on the total turnover of ass .....

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questions of law for our consideration:- "(i) Whether on the facts and in the circumstances of the case and in law, the Tribunal was right in holding that the adjustment arising out of the Arm's Length Price (ALP) is to be restricted to only International Transactions with the Associated Enterprise instead of entire turnover of the assessee ? (ii) Whether on the facts and in the circumstances of the case and in law, the order of the Tribunal is not perverse in view of the fact that con .....

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conclusions based on the computation figures so derived?". 3. Re.:- Question No.(i) (a) During the subject assessment year, the Respondent Assessee had both domestic and international transactions including transactions with Associated Enterprises over and above transaction with independent third parties. (b) The Tribunal by the impugned order rejected the Revenue's contention that the adjustment arising out of the Arm's Length Price (ALP) has to be made to the entire turnover of th .....

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of transactions entered into by the Respondent Assessee and not restricted only to its International Transactions with Associated Enterprise. In support, reliance was placed upon the fact that two appeals filed by the Revenue being Income Tax Appeal No.298 of 2013 (The Commissioner of Income-tax v. Super Diamonds) and Income Tax Appeal No.2068 of 2011 (The Commissioner of Income Tax v. Ankit Diamonds) raising a similar issue have been admitted on 5th May, 2014 and 16th February, 2015 respectivel .....

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P. Section 92 thereof specifically brings to charge income arising from International Transactions with an Associated Enterprise to tax on computation of income having regard to the ALP of the transactions entered into between the Associated Enterprises, as the heading of Chapter X itself indicates that these are special provisions relating to avoidance of tax and the mandate is to ensure adjustment in respect of the International Transactions with Associated Enterprise or specified domestic tra .....

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ot at ALP. The transactions with parties other than the International Transactions with Associated Enterprise or in respect of specified domestic transactions are not within the ambit of Chapter X of the Act. In fact, a similar question arose for our consideration in Tara Jewels Exports Pvt. Ltd. (supra) and an identical contention was negatived. So also the Delhi High Court in Keihin Panalfa Ltd. (supra) has negatived a similar contention. (e) In the facts and circumstances of the present case, .....

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turnover. 30.1 As regards alternate plea of ld. AR that no addition was called for in the case of assessee u/s 92C of the Act , as provisions of section 92CB of the Act relating to the power of Board along with the proviso to section 92C(2) squarely applies to the assessee as the difference in operating profit margin adopted by ld. Assessing Officer vis-à-vis operating profit margin declared by assessee is within the tolerance range of 5%. We observe that assessee has substance in the al .....

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s sustained to 5.78% by ld. CIT(A). From going through these figures we find that the difference of operating profit margin at which the international transaction has actually been undertaken as against arm s length price determined by Assessing Officer is within tolerance range of (±) 5% as provided in proviso to section 92C(2) of the Act. We are, therefore, of the view that in the given facts and circumstances, the price at which international transaction has actually been undertaken sh .....

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ch powers are not available to the CIT(A) and the CIT(A) ought to have decided the issue on merits. 7.2 The learned CIT(A) erred in fact and in law in confirming the action of the AO in invoking the provisions of section 40A(2) of the Act despite the fact that there is no finding on record that the remuneration paid by me appellant i^ unreasonable or excessive as compared to the market price. 7.3 The learned CIT(A) ought to have followed the order of the Third Member in the case of Jagdamba Roll .....

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reasons and also for abnormal increase in remuneration of the MD and accordingly disallowed ₹ 15,69,000/- being unreasonable expenditure. When the matter came up before CIT(A) assessee contended that disallowance has been made by invoking the provisions of section 40A(2)(b) without bringing any comparable or fair market rate. Ld. AR also submitted that MD is employee of the company and the expenses were incurred for business purpose. However, ld. CIT(A) rejected the contention made by ass .....

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of services rendered by the MD. The private sector remuneration is dictated by performance and the appellant ought to have justified the remuneration In terms of services rendered, terms of employment, performance of the company etc. Otherwise, the comparison with the earlier year is a fairly good estimate. The decision cited by the appellant is distinguished of the facts as that in the case the details of nature and extent of service justified the increase in remuneration. The appellant insist .....

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; 15,44,004/- in the immediately preceding F.Y. MD is not a person covered under the provisions of section 40A(2)(b) of the Act which even not disputed by Revenue also. Increase in the remuneration was mainly on account of bonus at ₹ 4,05,000/- and commission of ₹ 9,12,000/-. Ld. AR further submitted that reasonableness of the expenditure can be doubted only if ld. Assessing Officer has brought on record of any comparable company as well as comparable remuneration payable to MD. With .....

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and, ld. DR supported the orders of lower authorities. 35. We have heard the rival contentions and perused the record placed before us. Through this ground assessee is aggrieved with the action of ld. CIT(A) sustaining the disallowance of ₹ 15,69,000/- towards the remuneration paid to MD. We observe that during the year under appeal remuneration of ₹ 31,13,004/- was paid to MD which inter alia included payment of bonus of ₹ 4,05,000/- and commission of ₹ 9,12,000/-. In th .....

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y has increased even when the turnover has not increased cannot be a specific reason for making a disallowance. It is also not the contention of Revenue that the payment has been made to a relative as specified in section 40A(2)(b) of the Act. We find it relevant to discuss the provisions of section 40A(2)(b) of the Act which reads as follows :- Section 40A(2)(b) in The Income- Tax Act, 1995 (b) The persons referred to in clause (a) are the following, namely:- (i) where the assessee is an indivi .....

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stantial interest in the business or profession of the assessee or any director, partner or member of such company, firm, association or family, or any relative of such director, partner or member; (v) a company, firm, association of persons or Hindu undivided family of which a director, partner or member, as the case may be, has a substantial interest in the business or profession of the assessee; or any director, partner or member of such company, firm, association or family or any relative of .....

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tantial 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 profits) carrying not less th .....

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- clause (i) of clause (C) of section 40 applies.' In our view the above provisions contemplate that if the Assessing Officer was of the opinion that such expenditure if excessive or unreasonable having regard to the fair market value of services or facilities for which payment is made then such expenditure can be considered by him to be excessive or unreasonable. However, in the present case no such opinion has been formed by Assessing Officer with justification. It seems to be a mere guess .....

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further observe that in the case of disallowing the remuneration paid to director being disallowed as excessive or unreasonable was held in favour of assessee by the Co-ordinate Bench in the case of Jagdama Rollers Flour Mill Ltd. vs. ACIT (supra)by observing as under :- Provisions of s. 40A are non obstante provisions and, therefore, have an overriding effect over the other provisions allowing the deductions. This provision presupposes allowability of the expenditure otherwise. If the expenditu .....

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s of s. 37. According to the said section, the expenditure is allowable if it is incurred wholly and exclusively for the purpose of business. It is not in dispute that such expenditure is otherwise allowable under s, 37. However, a part of the expenditure can be disallowed if it is shown-(i) that the payment was made to the persons specified in cl. (b) of s. 40A(2); and (ii) if it is found that expenditure is excessive or unreasonable, having regard to the fact that the market value of the goods .....

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