TaxTMI 
TaxTMI 
2015 (6) TMI 94
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....n though Ld. AO did not issue the mandatory written show cause notice as per 2nd proviso to section 92C(3) of the Act. 2.1 The Ld. CIT(A) grossly erred in holding that Ld. AO has complied with the provision of 2nd proviso to section 92C(3) in the impugned assessment proceeding in the appellant's case. 2.2 The Ld. CIT(A) grossly erred in holding that 2nd proviso to section 92C(3) does not mandate service of specific written show cause notice to assessee. 2.3 The Ld. CIT(A) grossly erred in holding that 2nd proviso to section 92C(3) merely requires an "opportunity of being heard" to be given to assessee and nothing beyond that. 2.4 The Ld. CIT(A) grossly erred in holding in para 4.6(iv) of his appellate order that the legal infirmity committed by Ld. AO on account of failure of the Ld. AO to afford the appellant the opportunity, which is mandatory in terms of section 92C(3) of the Act, can be cured by the CIT(A) by admitting the additional evidences and thereby this would not violate and make the assessment proceedings invalid. 2.5 The Ld. CIT(A) grossly erred in applying the provisions of section 29288 of the Act to the facts of the present case of the appellant w....
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....he Act. 4.2 The Ld. CIT(A) grossly erred in rejecting the market driven uncontrolled comparable instances of yarn brokerage rates ranging from 0.5% to 0.75% of shipment value furnished by the Appellant. 4.3 The Ld. CIT (A) grossly erred in holding that Ld. AO can determine arm's length price based on estimation and best judgment without appreciating that the provisions of section 92C also applies for computation of arm's length price by Ld. AO in terms of section 9ZC(3) of the Act and that the Ld. AO in the present case of Appellant completely ignored these provisions while determining ALP of yard brokerage rate at 2%. 5. Under the facts and circumstances of Appellant's case and in law, the Ld. CIT (A) grossly erred in upholding the disallowance of Rs. 1, 70,012/- made by Ld. AO in respect of society charges and property tax paid by the Appellant for the premises from where it conducts its business." 3. Ground No. 1 to 3 are regarding the question whether the asessee and Kaybee Exim Pte Limited Singapore are Associated Enterprise (AEs) in terms of section 92A(1)/92A(2)(i) of the Income Tax Act, 1961. 4. The assessee is engaged in the business of running b....
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....aybee Exim Pte Limited, Singapore. Apart from this, Mr. Govind Karunakaran is Director in both the companies, therefore, the A.O. held that these two companies are AEs in terms of section 92A(1) as well as 92A(2) of the Act. The assessee challenged the action of the A.O. before the ld. CIT(A) and contended that the assessee and Kaybee Exim Pte Limited, Singapore are not AEs in terms of section 92A of the Act. It was contended before the ld. CIT(A) that Kaybee Exim Pte Limited, Singapore does not hold any direct or indirect share holding in assessee company and neither the assessee holding any share in Kaybee Exim Pte Limited, Singapore. Mr. Govind Karunakaran got 99.9% share in the assessee company and one share is held by Mr. Deepak Gurnani but Mr. Govind Karunakaran does not hold any shareholding in Kaybee Exim Pte Limited, Singapore, therefore, there is no direct or indirect shareholding by the assessee company and Kaybee Exim Pte Limited, Singapore in each other carrying 26% voting power. In fact, the assessee has advanced the argument before the ld. CIT(A) that none of the conditions prescribed under clause (a) to (m) of sub section (2) of section 92A are satisfied, therefore,....
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....fore, these specific criteria are required to be fulfilled. In the case of the assesee, none of the enterprises hold direct or indirect share carrying not less than 26% of voting power in the other enterprise. Similarly, there is no loan, advance or any guarantee furnished by either of the enterprises to the other enterprise. Except one Director, who is in both the companies, the requirement of more than half of the Board of Directors or member of the governing board or one more Executive Director or Executive Member of the governing board of one enterprise has been appointed by the other enterprises are not fulfilled. The ld. Sr. counsel has submitted that the authorities below had applied clause (j) of s.s. (2) of section 92A to treat the assessee and Kaybee Exim Pte Limited, Singapore to be AEs. However, the control of these companies is not in the hands of one individual or his relative or jointly by such individual and relative. Therefore, the assessee and Kaybee Exim Pte Limited, Singapore do not fall within the purview of the expression "AE" as per section 92A of the Act. The conditions stipulated under s.s. (2) of section 92A are to be fulfilled mandatorily to bring the two....
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....y or indirectly, or through one or more intermediaries, in the management or control or 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 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 carrying not less than twentysix per cent of the voting power in each of such enterprises; or (c) a loan advanced by one enterprise to the other enterprise constitutes not less than fifty-one per cent of the book value of the total assets of the other enterprise; or (d) one enterprise guarantees not less than ten per cent of the total borrowings of the other enterp....
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.... of section 92A and if the condition provided in clause (a) & (b) of s.s. (1) are independently satisfied then the two enterprises for the purpose of section 92B to 92E of the Act will be treated as AEs. Sub Sec. (2) of section 92A is a deeming fiction and therefore, it expends/enlarges the scope and meaning of expression "AE" provided under s.s. (1) of section 92A. Since s.s. (2) is a deeming fiction, therefore, it can be applied only in the specific facts of the case where any of the conditions stipulated in the clauses of this sub section are fulfilled. It has no general application in respect of the meaning "AE". Even otherwise, s.s. (1) of section 92A does not begun with the subjective clause "subject to s.s. (2)". The ld. Sr. counsel for the assessee has referred and placed reliance on the Memorandum explaining the provisions of the Finance Bill, 2002 whereby s.s (2) of section 92A has been amended and the clarification is provided as under:- "The existing provisions contained in section 92A of the Income-tax Act to provide as to when two enterprises shall be deemed to be associated enterprises. . It is proposed to amend sub-section (2) of the said section to clarify th....
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....pital of two or more enterprises, such enterprises are required to be treated as 'associated enterprise'. Interestingly even as definition of 'associated enterprises' has crucial references to 'participation in management or control or capital' at some places, the precise scope of this expression has not been defined under the provisions of the Incometax Act, and it has not come up for judicial adjudication either. This expression has been used in Article 9(1 of OECD and UN model conventions, but we find no assistance from the OECD and UN commentaries either. All that the OECD commentary says on the scope of this expression is that it refers to "parent and subsidiary companies and companies under common control". The true test of associated enterprise thus is control by one enterprise over the other, or control of two or more associated enterprises by a common interests, and such a control is essentially an effective control in decision making process. 11. In our considered view, therefore, the definition of associated enterprises in section 92A( 1 )(a) and (b ) is, what can be termed as, basic rule. In plain terms, the basic rule is that when one enterpr....
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....fiction under section 92(A)(2) we also apply to the situations of more than two associated enterprises envisaged in section 92A(1)(b). In this light, let us analyse the situation before us. The manufacture of goods is carried out by the CBU Konkan Agro, which is controlled by the assessee inasmuch as the CBU is wholly dependent on the use of trademarks in respect of which the assessee has exclusive rights. This relationship meets the test of de facto control on decision making as set out in section 92A(2)(g). The assessee in turn, as evident from information in Form 3CEB, is controlled, by way of equity participation, by Diageo PLC which also similarly controls other entities in the Diageo group, including the entities from which CBU has imported the raw materials. Diageo PLC thus, through the assessee as an intermediary, controls the CBU as also the Diageo group entities from which the CBU has imported raw materials. Clearly, therefore, the assessee, as also the CBU and its Diageo group supplier of raw materials are associated enterprises, and de facto all these enterprises are controlled, directly or indirectly or through intermediaries, by the same person i.e. Diageo PLC. In thi....
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....so holding 99.9% of shareholding in the assessee company. The A.O. has recorded the facts regarding the position of the Management/Director in the Kaybee Exim Pte Limited, Singapore as under:- Sr No. Name (as per ROC filing) Date of appointment (as per filing) Designation in Kaybee Pvt. Ltd (as per ROC filing) Designation in Grupokaybee as www.kaybeegroup Shri Vikram Kumar Chand 07.05.1993 Chairman cum Managing Director Managing Director Shri Deepak Atmaram Gurnami 07.05.1993 Director Director Shri Govind Karunakaran 19.02.1996 Director Chief Operating Officer Shri Nagendra Kumar Rallaoalli Director Finance Director Shri Suresh Chand Gupa Director -- There is no denial of the fact that Mr. Govind Karunakaran is Director and 99.9% shareholder of the assessee company and also is a Director and Chief Operating Officer of Kaybee Exim Pte Limited, Singapore. Therefore, Mr. Govind Karunakaran is not only participates in management of both the companies by he is holding the key position in....
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.... the said letter on the ground that the letter was issued by the Shree Solapur Yarn Merchant Association on 21-11-2011 and, therefore, it does not pertain for the assessmewnt year under consideration. The ld. CIT(A) accordingly confirmed the arm's length price adopted by the A.O. and the consequent adjustment. 11. Before us, the ld. Sr. counsel for the assessee submitted that though the said letter was issued by Shree Solapur Yarn Merchant Association on 21- 11-2011 but the rates confirmed in the said letter were prevailing in the assessment year under consideration. He has further submitted that to clarify this, the assessee has now submitted a fresh letter issued by Shree Solapur Yarn Merchant Association on 8.1.2015 wherein it has been confirmed that the rate of brokerage was prevalent during the F.Y. 2007-08. Thus, the ld. Sr. counsel for the assessee has pleaded that this letter can be admitted as additional evidence in support of the claim of the assessee. He has further contended that the A.O. has adopted the arm's length price without conducting any exercise as per the provisions of Chapter of the Act. Even otherwise the rate of commission for procurement of textile cann....
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....relied upon the order of the CIT(A) for A.Y. 2004-05 wherein a similar disallowance was made. The assessee though challenged the action of the A.O. before the ld. CIT(A) but could not succeed. 16. Before us, the ld. Sr. counsel for the assessee has submitted that the amount of property tax and society charges is an allowable deduction u/s 37(1) of the Act because the same are paid by the asessee in respect of the premises used for the business of the assessee. There is no dispute that the assessee has paid these charges as per the understanding with the owner of the property and, therefore, it is the liability of the assessee. The ld. Sr. counsel further contended that for A.Y. 2004-05, the assessee did not challenge the order of the CIT(A) for the reason that the amount involved in the said year was very small and it was only disallowance in the said year, therefore, by considering the fact that the expenditure for filing the appeal before the Tribunal would have been much more than the tax liability on the said amount of disallowance on account of property tax and society charges. He has further contended that when the assessee has disputed the disallowance even for the A.Y. 2....