TaxTMI 
TaxTMI 
2011 (11) TMI 514
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....the profit of business by the disallowable expenditure under section 43B and/or section 40A(7) and /or section 37(1) of the Act. (ii) The CIT(A) erred in upholding the action of AO reducing the rewinding charges from the profit of business for the purpose of computing the exemption under section 10A of the Act. (iii) The CIT(A) erred in upholding that the interest on deposit kept for the business purpose is income from other sources. He has, further, erred in not allowing the netting off of interest earned against the interest paid. (iv) The CIT(A) erred in upholding disallowance of the relief claimed under section 10A of the Income tax Act, 1961 by applying section 10A(7) read with section 80IA(10) of the Act to the extent of Rs. 61,72,623/-, consisting of : (a) an amount of Rs. 41,72,623/-, allegedly attributable to purchases from a related party, although, there was no finding that the increase in gross profit is attributable to the transactions (purchases) with related party; and (b) an amount of Rs. 20,00,000/- allegedly on account of fall in labour charges, although, there is no transaction or there is no finding that there was a t....
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....siness in finished diamonds, these were substituted by M/s. Sanghvi Exports during this year from which more than 50% purchases were made. The AO noted that average rate of purchase per carat from M/s. Sanghvi Exports was at Rs. 3,445/- compared to over all average purchase price of Rs. 4,193/- this year. 3.1 The AO therefore proceeded to examine the matter in detail. He asked the assessee to produce the following details:- (i) Cost of diamonds of Rs. 19,96,51,322/- in the hands of M/s. Sanghvi Exports. (ii) Copy of bills and packing list of purchase from M/s. Sanghvi Exports. (iii) Return of income, Balance Sheet and Profit & Loss Account of M/s. Sanghvi Exports for the assessment year 2004-05. (iv) Piecewise details of diamonds (a) Opening stock (b) purchase/import invoice wise (c) utilization of diamonds (d) closing stock (v) It is seen that labour charges of Rs.72 lacs paid for consumption of raw material of Rs.66.10 crores in FY 2002-03 while Rs.15 lacs was paid for consumption of raw material of Rs.55.11 crores (in FY 2003-04). (vi) Name, address, qualification and salary of employees 3.2 The assessee, however, did not file any ....
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.... had been made which shows that the purchases had been made at arms length. The AO, however, observed that customs authorities were mainly concerned with addition to exports and do not make any checks from income-tax angle. Further, GM in response to Q.No.24 had stated that customs authorities accepted the purchases and sales invoice at face value and no special scrutiny was done during the year. As regards transfer pricing adjustment, the AO observed that these were applicable to international transactions with non-resident associate enterprises and, therefore, merely because no adjustment was made, it could not be argued that provisions of Section 10A(7) were not applicable. The assessee also explained that M/s. Classic Diamond India Ltd. which was also in similar business had declared profit margin of 19.42% in the relevant year and, therefore, profit declared by the assessee could not be said to be excessive. The AO, however, observed that the assessee's own case was best comparison and the assessee had not been able to explain satisfactorily the substantial rise in GP rate this year. The AO, further observed, that M/s. Sanghvi Exports had provided credit facilities to the asse....
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.... by him that increase in own employee cost was because of normal increment. It was noted by him that in next assessment year i.e. assessment year 2005-06, the labour charges again increased to Rs. 75.00 lacs though consumption of raw material had declined substantially. The AO, therefore, concluded that lower labour charges this year were due to diversion of labour to other concerns. The assessee had manipulated labour charges by having the sharing arrangement on assortment activity in the premises of M/s. Sanghvi Exports and designing activities in the new premises at Prince Arcade outside SEEPZ. The AO, therefore, applied the provisions of section 40A(7) to the labour charges also and reduced profit by Rs. 60.00 lacs. 3.6 The AO thus made total adjustment under section 10A(7) of Rs. 5,58,18,823/-, Rs. 4,98,18,823/- + Rs. 60,00,000/- after reducing the profit by the above amount. The AO computed eligible profit under section 10A at Rs. 1,89,37,109/- and deduction under section 10A was computed at Rs. 1,89,37,109/- as the entire sales of the assessee were export sales. The total income was thus computed at Rs. 6,10,05,440/- in place of nil income returned by the assessee. 3.7....
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....ts 11,417 1,138.42 9,971 17,535 2,712.44 15,469 Ear Topes 47,457 1,823.76 3,843 8,090 635.87 3,515 Necklaces 1,914 228.47 11,937 1,040 238.93 22,974 Pendants 43,493 1,572.53 3,616 41,314 1,256.22 3,041 Rings 58,988 2,535.82 4,299 44,113 2,937.58 6,659 Total 7,355.19 7,864.16 3.9 The assessee also submitted that the onus was on the revenue to prove that the profit of the assessee had been inflated. The assessee also reiterated the submissions made before the AO that no adjustment had been made by the TPO which shows that price were at arms' length. Further, transaction at SEEPZ were checked by customs authorities and there was no scope of manipulation. As regards the transfer of profits, it was also submitted that M/s. Sanghvi Exports had earned net profit before depreciation of Rs. 18.24 crores in assessment year 2004-05 on turnover of Rs. 502 crores compared to profit of Rs. 18.34 crores on turnover of Rs. 445.75 crores in assessment year 2003-04. It was, further, pointed out that s....
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....AR for the assessee reiterated the submissions made before lower authorities. It was argued that comparison could not be made on the basis of average purchase rate. It was submitted that the diamonds purchased by the assessee consisted of several grades and therefore comparison should be made only with respect to the same or similar grades and, in case, this process was adopted, the purchases from M/s. Sanghvi Exports were at a higher rate. He referred to details of purchase for different grade of diamonds placed at page-187 of the paper book which gave average purchase price per carat in respect of these grades at Rs. 3,697/- per carat. The comparative details of purchases in respect of same grades in case of M/s. Dhaval Exports and M/s. Super Diam were placed at page-202 of the paper book which gave the average purchase rate per carat of Rs. 3,518/-. It was thus submitted that in respect of purchase of same grades, the average purchase price in case of purchase from M/s. Sanghvi Exports were more. The other purchases from M/s. Sanghvi Exports which were non-comparable were given at page-186 of the paper book as per which average purchase rate was Rs. 2,847/-, but the same was not....
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....er carat by M/s. Sanghvi Exports was Rs. 7,310/-. Sale made by M/s. Sanghvi Exports to the assessee was at average rate of Rs. 3,445/- which was not explained. The assessee did not give cost of purchases in case of M/s. Sanghvi Exports. It was also submitted that M/s. Sanghvi Exports was not 100% tax exempt and, therefore, by transferring profit to the assessee there was tax advantage. The GP rate of the assessee had increased abnormally during the year which was not explained properly though turnover had declined. It was further submitted that the grade-wise comparison given by the assessee was not reliable as within the same grade there was steep variation in prices which was clear from the details given in paper book. It was pointed out that the assessee had not given piece-wise details per carat which had major impact on the prices. It was further argued that in respect of purchases from the group concern, on average, there were 20 pieces per carat whereas in respect of other purchases there were 350 per carat which shows that the size of diamond purchased from the group concern was bigger and, therefore, price should have been higher. But it was just reverse. The Ld. AR also p....
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....essee concern i.e. M/s. Saghvi Exports had increased abnormally to more than 50% of the total purchases compared to 5% of total purchases in the immediate preceding year and that purchases from unrelated parties i.e. Dhaval Exports and M/s. Super Diam had declined substantially. Other undisputed facts are that average purchase rate per carat of diamonds during the year declined substantially to Rs. 4,205/- per carat from Rs. 4,602/- per carat in the immediate preceding year and that the average purchase rate of diamonds per carat during the year from M/s. Saghvi Exports was Rs. 3,445/- against the over all average rate of purchases of Rs. 4,205/-. The diamond pieces on average were larger in size in case of purchases from group concern at 20 pieces per carat as compared to 35 pieces per carat in case of non-related purchases and, therefore, rate should have been higher from group concerns. Further, AO also noted from audited accounts of M/s. Saghvi Exports and about which there is no dispute that average sale rate of diamond per carat in case of that concern was Rs. 7,310/- whereas the average sale rate to the assessee was only Rs. 3,445/-. There is also no dispute that M/s. Saghvi....
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....rom. Section 80IA(8) : Where any goods or services held for the purposes of the eligible business are transferred to any other business carried on by the assessee, or where any goods or services held for the purposes of any other business carried on by the assessee are transferred to the eligible business and, in either case, the consideration, if any, for such transfer as recorded in the accounts of the eligible business does not correspond to the market value of such goods and services as on the date of the transfer, then for the purposes of the deduction under this section, the profits and gains of such eligible business shall be computed as if the transfer, in either case, had been made at the market value of such goods or services as on that date: Provided that where, in the opinion of the Assessing Officer, the computation of the profits and gains of the eligible business in the manner hereinbefore specified presents exceptional difficulties, the Assessing Officer may compute such profits and gains on such reasonable basis as he may deem fit. Explanation - For the purposes of this sub-section, "market value", in relation to any goods or services, means the price that....
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....t have much impact on GP rate. There is thus no satisfactory explanation regarding exceptional GP rate this year. The explanation of the assessee that GP rate was also high a few years back in assessment years 1999-00 to 2001-02 is not relevant as comparison has to be made with figures in the immediate preceding year and it was found that not only in the immediate preceding year but also in assessment year 2002-03, the GP rate was around 10%. It is also not explained satisfactorily as to how GP rate suddenly came back to normal in the immediate succeeding year. 3.19 The assessee also could not give any satisfactory explanation as to why in this year purchases from M/s. Sanghvi Exports increased substantially when the other parties from whom purchases were made till last year remained in the same business and that M/s. Sanghvi Exports was also in the same business in the earlier year when purchases made from this concern were nominal. Further, there is no satisfactory explanation for M/s. Sanghvi Exports selling diamonds to the assessee at a very low average rate of Rs. 3,445/- per carat where the overall average sale rate of that concern was Rs. 7,310/- per carat. The claim that....
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.... comparison could be misleading. We find that within the same colour and cut, there is steep variation in the prices. For example, diamond prices in case of grade, D-cut OWLB / N varied from, Rs. 2,255/- to Rs. 14,883/-per carat and similarly, in case of D-cut OWLB prices varied from Rs. 1,780 per carat to Rs. 17,364/- per carat and in case of D-cut OW/N, from Rs. 2,250/- to Rs. 8,034/- per carat, which is clear from the details given at page 188 to 189 of the paper book. When there is so steep variation within the same grade, any comparison based on grade is not reliable. Diamond prices are heavily influenced by the size of diamonds but the assessee is not maintaining piece-wise details of diamonds used. It is also to be noted, that on average diamonds purchased from the group concern were larger in size than those from other concerns as average number of pieces per carat in case of group concern was 20 whereas in case of others, it was 35. Therefore, on this account also, purchase price from the group concern should have been higher. We further note from details at page 186 of the paper book that purchase rate from M/s. Sanghvi Exports in case of other grades was only Rs. 2,847/-....
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....e has not been explained satisfactorily. The excess profit computed on the basis of normal GP rate is Rs. 4,98,18,823/-. Therefore, in our view, adjustment of Rs. 4,98,18,823/- made by the AO under section 10A(7) read with section 80IA(10) is justified on the facts of the case. We, therefore, set aside the order of CIT(A) on this point and confirm the order of the AO. 3.22 As regards the transfer of profit on account of labour charges, the ld. AR has argued that provisions of section 80I(8) are not applicable as same relate to transfer of goods. However the ld. DR rightly pointed out that section 80IA(8) would also apply to transfer of services therefore, in case services are provided to group concern, the provisions would apply. The details of employee cost and labour charges for this year as well as immediate preceding and immediate succeeding year have been given in para 3.4 earlier. The employee cost had gone up by about 20% this year but labour charges have declined steeply from Rs. 73.00 lacs to only Rs. 15.00 lacs though raw material consumption has declined only by 20%. The assessee has explained that employee cost went up because of increase in number of employees but d....
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....47/- which had been paid after due date. He, therefore, disallowed the same. In appeal CIT(A) held that employees contribution paid within the grace period has to be allowed and those after grace period have to be disallowed. Aggrieved by the said decision revenue is in appeal. 4.1 We have heard both the parties, perused the records and considered the matter carefully. Under internal Instructions of PF and ESIC authorities, a grace period of 5 days has been, allowed from the due date for making payments and therefore, employees contribution paid within grace period has to be allowed as deduction under section 36(va). We, therefore, see no infirmity in the order of CIT(A) and the same is, therefore, upheld. 5. The third dispute which is relevant only to the appeal of the assessee is regarding non adjusting profit of the business by the expenses disallowed under section 43B, 40A(7) and 37(1). The AO had made following disallowance which had not been considered for the purpose of section 10A:- Ex-gratia Rs. 11,10,719/- Unpaid bonus Rs. 7,47,341/- Unpaid leave encashment Rs. 1,92,138/- Unpaid sales-tax Rs. 23,868/- Provisions of gratuity u/s.40A(7) R....