2023 (3) TMI 1546 - HC - Income Tax

Common director alone insufficient to establish Associated Enterprise relationship under section 92A without meeting specific control criteria

The Principal Commissioner Of Income Tax (Central) Bengaluru, The Deputy Commissioner Of Income Tax Central Circle, 1 (3) Bengaluru. Versus M/s. Obulapuram Mining Company Pvt. Limited

The Karnataka HC upheld the tribunal's decision that no Associated Enterprise relationship existed between the assessee company and GLATIPL despite having ... TP Adjustment - relationship of AE between the Assessee Company and GLATIPL - Associated Enterprise Relationship - one of the directors of the assessee company and of GLATIPL is common - whether an entity is an associate enterprise and control is not merely in terms of shareholding but participation in management and decision making? - HELD THAT:- It was held by the tribunal in this case that in order to constitute relationship of an AE, the parameters laid down in both sub sections (1) and (2) should be fulfilled. As per the explanation, amendment carried out in sub section (2) of section 92A by Finance Act, 2002 w.e.f. 01.04.2002, as reproduced by the tribunal in Para 11 above, mere participation of one or more persons in the management or control or capital of both the enterprises shall not make them AE unless the criteria specified in sub section (2) are fulfilled and even as per the learned DR of the revenue, clause (j) of sub section (2) of section 92A is attracted but this claim is also devoid of merit because he could only point out that one director of the assessee company and of GLATIPL is common but this fact alone does not establish that the said common director is controlling GLATIPL when the said company is a subsidiary of ILSGL and the assessee company or its directors are not having any relationship with ILSGL or director of ILSGL. Hence, by respectfully following the Tribunal’s order, that since the parameters laid down in sub section (1) and (2) of section 92A are not fulfilled, there is no relationship of AE between the Assessee Company and GLATIPL and therefore, the provisions of Chapter X of the I.T. Act has no application. Disallowance of Transportation charges, Disallowance of Expenses under Explanation to section 37 (1) and Addition made on account of sale of Land - In line with the tribunal order in A.Y. 2010-11 in assessee's own case [2016 (7) TMI 1435 - ITAT BANGALORE] we delete first two disallowances i.e. 1) Disallowance of Transportation charges, and 2) Disallowance of Expenses under Explanation to section 37 (1) and in respect of third issue i.e. Addition made on account of sale of Land, we set aside the order of CIT (A) on that issue and restore the matter to A.O. for a fresh decision with the same directions as were given by the tribunal in A. Y. 2010-11. Issues Involved:1. Transfer Pricing Adjustment and Associated Enterprise Relationship2. Claim of Bogus Transportation Expenses3. Disallowance of Expenses Attributable to Illegal MiningIssue-wise Detailed Analysis:1. Transfer Pricing Adjustment and Associated Enterprise Relationship:The Revenue challenged the Tribunal's decision, which held that there was no 'associated enterprise' (AE) relationship between the assessee and GLA Trading International Pte. Ltd. (GLATIPL) under Section 92A of the Income Tax Act. The Tribunal concluded that mere common directorship does not establish an AE relationship unless both subsections (1) and (2) of Section 92A are satisfied. The Tribunal relied on its order in the case of Page Industries Ltd. vs. DCIT, where it was held that participation in management or control alone does not suffice to establish an AE relationship without fulfilling the criteria in subsection (2). Since the assessee and GLATIPL did not meet these criteria, the provisions of Chapter X of the Income Tax Act regarding transfer pricing were deemed inapplicable.2. Claim of Bogus Transportation Expenses:The Revenue contested the Tribunal's deletion of additions related to bogus transportation expenses. The Assessing Officer had disallowed these expenses due to lack of supporting evidence and discrepancies in claims. The Tribunal, however, granted relief to the assessee, citing that the assessing authority failed to provide the opportunity for cross-examination of the transporters despite requests. The Tribunal relied on precedents from the Delhi High Court, emphasizing the necessity of cross-examination for the admissibility of evidence against the assessee. The Tribunal found that the disallowance was unsustainable without the statements from the transporters being subjected to cross-examination.3. Disallowance of Expenses Attributable to Illegal Mining:The Tribunal also addressed the disallowance of expenses related to illegal mining, which the Assessing Officer had disallowed under Section 37(1) of the Income Tax Act. The disallowance was based on findings of illegal mining activities by the assessee, as reported by the CBI and other authorities. The Tribunal, however, followed its earlier decision for the assessment year 2010-11, where it had allowed similar expenses, stating that such disallowances were not justified as they were not incurred for any unlawful purposes. The Tribunal held that the expenses claimed were not hit by the explanation to Section 37(1), which disallows expenses for illegal purposes.Conclusion:The High Court upheld the Tribunal's decision, confirming that the Tribunal's interpretations and applications of the law were correct. The Revenue's appeal was rejected, and the Tribunal's order, which granted relief to the assessee on all contested issues, was affirmed. The Court emphasized that the Tribunal had extensively considered the facts and legal precedents, and the Revenue's grounds for appeal did not warrant interference with the Tribunal's findings.