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2017 (1) TMI 674 - ITAT AHMEDABAD

2017 (1) TMI 674 - ITAT AHMEDABAD - TMI - Transfer pricing adjustment - ALP adjustment - Held that:- As clarified in the Memorandum explaining the provisions of the Finance Bill 2002 which, while inserting the words “For the purpose of sub section (1) of section 92A” in Section 92A(2), had observed that “It is proposed to amend sub-section (2) of the said section to clarify that the mere fact of participation by one enterprise in the management or control or capital of the other enterprise, or t .....

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n, and without going any further into the matter, we approve the impugned deletion of ALP adjustment. The plea of the assesse, in cross objection, is upheld and, for that reason, grievance of the Assessing Officer, in appeal, is dismissed as infructuous. - Section 68 addition as well as interest expenditure incurred there upon - Held that:- Assessing Officer as well as DDIT (Inv) were first of all of the opinion that although six out of seven entities were based at Mumbai whereas their busin .....

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s interest expenditure incurred there upon. This Revenue’s substantive ground on both these aspects is accordingly declined. - Decided in favour of assessee - Disallowance of provision of forward contract payable - whether the entry passed in the books of account in respect of difference in exchange rate cannot be said to be in the nature of notional/unascertained liability - Held that:- The assessee has admittedly made the impugned provision in view of difference in exchange rate as on the .....

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ility arising on account of foreign exchange rate difference so as to make the impugned provision as per the relevant accounting standard issued by the Institute of Chartered Accountants of India. We thus find no reason to restore the impugned disallowance. - ITA No.1514/Ahd/2012, C.O. No.184/Ahd/2012 - Dated:- 3-1-2017 - Pramod Kumar AM And S. S. Godara JM Dr. Banwari for the revenue R.B. Shah for the assessee ORDER Per Bench 1. By way of this appeal, the Assessing Officer has challenged cor .....

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being disposed of by way of this consolidated order. 2. The grounds of appeal numbers 1 to 4 in assessee s appeal, which relate to an arm s length price adjustment and which we will take up together, are as follows: [1] On the facts and in the circumstances of the case and in law, the Ld.CIT (A) erred in deleting addition made of ₹ 5,22,64,779/- u/s. 92CA(3) by holding that the TPO had initially placed reliance on mean margin ratio of six entities including exchange difference income but .....

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mstances of the case and in law, the Ld.CIT(A) erred in admitting and deciding the appeal in contravention of the provisions of section 144C of I.T. Act. [4] On the facts and in the circumstances of the case and in law, the Ld. CIT[A] failed to appreciate that no objection filed by the assessee before the A.O., after receipt of draft assessment order as per the explicit provision of section 144C(2)(b)(ii) of I.T. Act. 3. In the cross objection, the assessee has raised a grievance which is interc .....

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to transfer pricing officer for determining the arm s length price in respect of transaction with M/s Blue Gems BVBA. 2. It is therefore prayed that above action made by Assessing Officer and confirmed by CIT(A) may please be deleted. 4. The relevant material facts are like this. The assessee before us is engaged I the business of manufacture and sale, domestic as well as exports, of the polished diamonds. During the relevant previous year, the assessee had entered into certain international tra .....

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ted that even though Blue Gems BVBA was covered by the definition of a specified person, which are treated as related parties, under section 40A(2)(b), this fact was irrelevant for the purposes of invoking transfer pricing provisions. It was submitted that Blue Gems BVBA was not an associated enterprise of the assessee company under section 92A, as the conditions specified in the said section were not satisfied. The assessee made elaborate submissions in this regard and also pointed out that so .....

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did not find any favour with the Assessing Officer. He rejected these submissions and observed as follows: 4.2 The contention of the assessee has been considered. The assessee has stated that M/s. Blue Gems BVBA does not fall under the definition of Associate Enterprise as defined u/s. 92A(1) & (2) of the Act. It has also stated that report u/s.92E is required to be filed only after transactions are done with associate enterprise. Further, it has stated that it does not fall within the deemi .....

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capital of 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 indirect, 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 prev .....

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of such individual; or (k) where one enterprise is controlled by Hindu undivided family, the other enterprise is controlled by a member of such Hindu undivided family or by a relative of a member of such Hindu undivided family or jointly by such member and his relative; or (i) 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 person or body of individuals; or (m) there exists .....

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son being directors of the company. It is clear that both the entities are being controlled by the same family or four brothers and their close relatives. It is clear that M/s. Blue Gems BVBA is closely related with M/s. Veer Gems and falls within the parameters of sec. 92A(2)(j). 4.4. In view of the above facts and express provision of law, it is held that contention of the assessee is devoid of any merit and reference for determination of transfer pricing is correctly made. 5. The Assessing Of .....

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ociated enterprises , the CIT(A) proceeded to deal with examine correctness of the ALP adjustment impugned in appeal before him, held it to be unsustainable on the facts of the case and in law, and then observed that as addition stands deleted on merits of the case, no discussion is made as to whether Blue Gems BVBA is associated enterprises of the assessee or not as the same is only academic in nature . For the reasons we will set out a little later in this order, it is not really necessary to .....

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heard the rival contentions, perused the material on record and duly considered facts of the case in the light of the applicable legal position. 7. We find that in order to invoke the transfer pricing provisions, and deal with the determination of arm s length price, it is absolutely essential that the international transaction in question must be between the associated enterprises. It is perhaps the most basic aspect of the matter and foundational basis on which transfer pricing provisions are .....

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r not would be infructuous in the event of enterprises not being associated enterprises. We are unable to see any merits in the approach adopted by the learned CIT(A). In our considered view, the first thing that needs to be adjudicated upon is whether or not the assessee and Blue Gems BVBA are associated enterprises. As we proceed to deal with this question, we may first take note of Section 92A which, for ready reference, is reproduced below: Meaning of associated enterprise. 92A. (1) For the .....

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cipate, 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,- (a) one enterprise holds, directly or indirectly, shares carrying not less than twenty-six per cent of the voting power in the other enterprise; or (b) any person or enterprise holds, directly or indirectly, shares carr .....

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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 appointed by the same person or persons; or (g) the manufacture or processing of goods or articles or business carried out by one enterprise is wholly dependent on the use of know-how, patents, copyrights, trade-marks, licen .....

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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 persons specified by the other enterprise, and the prices and other conditions relating thereto are influenced by such other enterprise; or (j) where one enterprise is controlled by an individual, the other enterprise is .....

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er 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. [Emphasis, by underlining, supplied by us] 8. As we deal with this issue, lets first appreciate the scheme of Section 92A. A plain reading of this statutory provision makes the legal position quite clear. The basic rule for treating the enterprises as associated enterprises is set out in Section 92A(1). The illus .....

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r 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 . Section 92(A)(2) only provides illustrations of the cases in which such an enterprise participates in management, capital or control of another enterprise. In other words, what Section 92A (1) decides is the principle on the basis of which one has to examine whether or not two or more enterprise are associated enterprise .....

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reated as associated enterprise, as also is the position when common persons participate in management, control or capital of both the enterprises. However, the expression participation in management or capital or control is not a defined expression. To find the meaning of this expression, one has take recourse to Section 92(2) which gives practical illustrations, which are exhaustive and not simply illustrative- as clarified in the Memorandum explaining the provisions of the Finance Bill 2002 w .....

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on (2) are fulfilled . In this sense, Section 92A(2) governs the operation of Section 92A(1) by controlling the definition of participation in management or capital or control by one of the enterprise in the other enterprise. If a form of participation in management, capital or control is not recognized by Section 92A(2), even if it ends up in de facto or even de jure participation in management, capital or control by one of the enterprise in the other enterprise, it does not result in the relat .....

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has a de facto participation capital, management or control over the other enterprises, the two enterprises cannot be said to be associated enterprises. That is a what coordinate bench decisions in the cases of Orchid Pharma Ltd Vs DCIT [(2016) 76 taxmann.com 63 (Chennai - Trib.)] and Page Industries Ltd Vs DCIT {(2016) 159 ITD 680 (Bang)] also hold. 9. The case of the revenue hinges on application of clause (j) of Section 92A(2). That is the only clause invoked by the Assessing Officer, and if .....

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. In the TPO s order, a reference is also made to some other clauses of Section 92A(2) as follows: The firm has made substantial purchases from M/s. Blue Gems BVBA. The partners of the firm are three brothers viz. Shri Piyush M. Shah, Mukesh M. Shah, Dilip M. Shah and their wifes/son, together holding the entire partnership stake. The fourth brother Nareshkumar Shah, along with his wife Surekhaben Shah and his son Mitesh Shah control the entire share holding of M/s Blue Gems BVBA, the fourth bro .....

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er of the enterprise, clause (m) is only an enabling provision for prescribing any other relationship of mutual interest that can lead to the enterprises being treated as associated enterprises but then no such relationship has been prescribed as yet. Nothing, therefore, turns of Section 92A(2)(k) and 92A(2)(m) either. In any of the orders of authorities below, or during the course arguments before us, no other parts of Section 92A(2) have been relied upon by the authorities below or by the lear .....

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2 which, while inserting the words For the purpose of sub section (1) of section 92A in Section 92A(2), had observed that It is proposed to amend sub-section (2) of the said section to clarify that the mere fact of participation by one enterprise in the management or control or capital of the other enterprise, or the participation of one or more persons in the management or control or capital of both the enterprises shall not make them associated enterprises, unless the criteria specified in sub .....

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ance of the Assessing Officer, in appeal, is dismissed as infructuous. 11. Ground nos. 1 to 4, raised in the appeal filed by the Assessing Officer, are dismissed as infructuous, and grievances raised by the assessee, in the cross objection, are allowed. 12. Revenue s next substantive ground seeks to restore section 68 unexplained cash credits addition of ₹ 8,50,00,000/- followed by disallowance of interest expenses thereupon of ₹ 66,94,929/-, made by the Assessing Officer and deleted .....

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133(6) notice as well as section 131 summons. He first of all expressed surprise that these seven entities stated premises had remained closed for past 6 - 7 years. He thus issued a commission to the DDIT (Inv.), Mumbai to carry out necessary enquiries. The said authority submitted its report inter alia sating that it could find although premises of M/s Impex Gems, there was nobody to attend the proceedings. Similarly, he recorded statement of one Shri Babulal Jain who confirmed to have given lo .....

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see s claim of having received the impugned loans was not supported by genuineness & creditworthy evidence which could prove that all the seven parties hereinabove had been having source thereof in the nature of income, they had meagre means without any capacity to lend the corresponding sums, no books of account were maintained and that all transactions had demonstrated a repetitive pattern of accumulated deposits in a short span of time followed by transfer of money to assessee s account i .....

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r grossly erred in making addition of ₹ 8,50,00,000/- to the total income off assessee as unexplained cash credit. During the course of assessment proceedings, assessee was asked to prove the identity, genuineness and creditworthiness of the persons from whom assessee had taken unsecured loan. In compliance of the same, assessee filed PAN and confirmations of the parties vide letter dated 20.10.2010 from whom unsecured loan was taken during the year under consideration. Assessee also filed .....

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ion of account Acknowledgment of return of income Bank statement Tax Audit Report 2. Shri Manish A. Agarwal (Prop. M/s Laxmi Diamonds) Confirmation of account Acknowledgment of return of income Bank statement Tax Audit Report 3. M/s Meenakshi Exports Confirmation of account Acknowledgment of return of income Bank statement Tax Audit Report 4. M/s Navkar Diamonds Confirmation of account Acknowledgment of return of income Bank statement Tax Audit Report 5. Shri Ghanshyam Sharma (Prop. M/s Jewel Di .....

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sessee u/s 68 of the Act stands clearly discharged & thus, adverse inference cannot be drawn on the basis of conjectures and surmises. It is very pertinent to point out that all the loans have been repaid during the financial year itself & this fact is evident on perusal of confirmation of accounts filed during the course of assessment proceedings. As the loans have already been repaid during the financial year itself, adverse inference in assessee's case cannot be drawn if informati .....

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se parties, there can not be any doubt relating to existence / genuineness of the parties and it is illogical and absurd on the part of assessing officer to doubt their identity, genuineness and creditworthiness on the pretext that parties could not be found at Surat address. It is further submitted that assessing officer received all the relevant information from the parties in compliance of the letters issued on them. No addition can be made on the basis of report of DDIT(Inv), Mumbai as all t .....

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es not have any bearing so far as assessee is concerned especially considering the fact that loans have been repaid in the same financial year." "Creditworthiness of the parties from whom assessee had taken loan can not at all be doubted as these parties are regularly filing their return of income and capability to give loan to assessee is clearly evident from the return of income filed by theses parties & their returns of income have been accepted in the scrutiny assessments made .....

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ntity of creditors by giving their complete addresses, GIR numbers/PAN as well as confirmation along with copies of assessment orders wherever available. It is to be noted that SLP filed by revenue against this decision has also been rejected - 254 ITR 275 (St.)." Besides this, the learned AR placed reliance on various other judicial pronouncements and also contended that no addition can be made to the income of assessee if source of source is not established by assessee. He contended that .....

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on drawn from the report of DDIT (Inv) Unit-IV, Mumbai. It has been the main contention of assessing officer that depositors have no demonstrable source of income and that they are persons of meagre means. It is also seen that in the course qc assessment proceedings, all the depositors have submitted their confirmation letter along with various other details in response to inquiry made by assessing officer u/s 133(6) of the Act. It is further seen that the assessment order u/s 143(3) of the Act .....

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ity of the parties have not been established. Similarly, adverse inference cannot be drawn on the basis of report of DDIT (Inv) as department has passed scrutiny assessment orders in various cases. Considering the overall facts and material on record, I am of the opinion that the ratio of Honourable Gujarat High Court decision in case of M/s Rohini Builders 256 ITR 230 (Guj) is squarely applicable and no addition can be made u/s 68 of the Act as identity and capacity of depositors and genuinenes .....

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eals that the assessee had filed confirmation of accounts, acknowledge of return of income, bank statements and tax audit report in all seven cases apart from trading account, P&L account and balance sheet of the last entity M/s Jinesh Gems. It has further come on record that the assessee has been able to prove repayments of the loan sums in question in the impugned assessment year. This fact is further not disputed before us. It is therefore clear that the assessee has filed all the relevan .....

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hat the assessee before us has also proceeded on the same line of action by producing relevant record and all details of its seven creditors. Learned Departmental Representative then harps on Assessing Officer s findings that the seven creditors in question had meagre source of income and that they were further found to be not carrying out any business activity. We do not find any reason to concur with all these contentions. We are of the view that the Assessing Officer as well as DDIT (Inv) wer .....

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reason to interfere with CIT(A) s observation hereinabove deleting the impugned section 68 addition as well as interest expenditure incurred there upon. This Revenue s substantive ground on both these aspects is accordingly declined. 16. The Revenue s last substantive ground pleads that the CIT(A) erred in deleting disallowance of provision of forward contract payable of ₹ 34,35,000/- by holding that the entry passed in the books of account in respect of difference in exchange rate cannot .....

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ngs, vide order sheet entry dated 01.11.2011, the assessee was required to give the full details of the provision entry of ₹ 34,35,000/- on account of forward contract payable. The assessee vide its submission dated 16.12.2011 submitted that the account shown as payable as per MTM certificate for A.Y. 2008-09 was reversed in the A.Y. 2009-10. Assessing officer observed that this liability which is worked out as on 31.03.2008 has not crystallised as on that date. According to A.O the same r .....

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d that assessing officer has erred in making addition of ₹ 34,35,000/- to the total income of assessee on account of provision for forward contract payable. During the course of assessment proceedings, assessee submitted that account of forward contract was reflected in the books of accounts as per MTM certificate of ABN Amro Bank. Assessee is required to record forward contract transactions as per Accounting Standard 11 of ICAI & the same provides that forward contracts remaining outs .....

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much as entry is passed on the basis of actual closing rate prevailing at the end of financial year as per MTM certificate issued by ABN Amro Bank. During the course of assessment proceedings, assessee filed copy of MTM certificate and copy of forward contract payable. As per MTM certificate, it is evident that exchange rate of USD has gone up as on 31st March as compared to the exchange rate prevailing at the time of booking of forward contracts & this has resulted into exchange loss to ass .....

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ed entry for loss only in respect of the balance amount & the exchange loss is divided into two years as per accrual system of accounting & the Accounting Standard of ICAI. Now, if any disallowance is made for the year under consideration in that case, deduction should be allowed of this amount in subsequent year, as assessee has claimed only balance loss i.e. loss arising on account of difference between exchange rate as on 31/03/2008 & exchange rate prevailing as on the date of can .....

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iling as on the date on which forward contract has been booked and the exchange rate prevailing at the end of the year i.e. on 31.03.2008 as per MTM certificate issued by ABN Amro Bank. It is not in dispute that assessee is following mercantile method of accounting and as per this method, all the expenses/gains which pertains/arises during the year under consideration is required to be considered in the Profit and Loss account for that year itself. The provision entry has been made because the e .....

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been entered into during the year under consideration, losses/gain relating to the fluctuation in exchange rate pertaining to said forward contract should also be considered in P & L A/c for the year under consideration. It is also further seen that in the immediately succeeding year when forward contract has been cancelled, assessee has recognised expense/loss only in respect of the balance amount i.e. in respect of the amount in excess of the provision made during the year under considera .....

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