PR COMMISSIONER OF INCOME TAX JAIPUR-II vs. M/S VEDANSH JEWELS PVT LTD

HIGH COURT OF JUDICATURE FOR RAJASTHAN BENCH AT JAIPUR D.B. Income Tax Appeal No. 271 / 2017 Pr. Commissioner of Income Tax, Jaipur-II, Jaipur. ----Appellant Versus M/S. Vedansh Jewels Pvt. Ltd., H-20, Bhagat Singh Marg, Jaipur ----Respondent Connected With D.B. Income Tax Appeal No. 272 / 2017 Pr. Commissioner of Income Tax, Jaipur-II, Jaipur. ----Appellant Versus M/S. Vedansh Jewels Pvt. Ltd., H-20, Bhagat Singh Marg, Jaipur ----Respondent _____________________________________________________ For Appellant(s) : Mr. K.D. Mathur & Mr. Prateek Kedawat for Mr. R.B. Mathur For Respondent(s) : _____________________________________________________ HON'BLE MR. JUSTICE K.S. JHAVERI HON'BLE MR. JUSTICE VIJAY KUMAR VYAS Judgment 24/10/2017 1. In both appeals common questions of law and facts are involved, hence, they are decided by this common judgment. 2. By way of the appeals, the department has assailed the judgment and order of the Tribunal whereby the Tribunal has allowed the appeal of the assessee modifying the order of CIT(A). 3. Counsel for the appellant has framed the following questions

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of law:- In DBITA No. 271/2017 “i) Whether on the facts and in circumstances of the case, the ITAT was justified in law in holding that surplus amount in the freight export account and in the insurance export of Rs. 1830488/- is derived from export activities and on those amounts deduction u/s 10AA is allowable. ii) Whether on the facts and in circumstances of the case, the ITAT has failed to appreciate the fact as brought on record by the Assessing Officer regarding disallowance of deduction u/s 10AA of deemed profit of Rs. 5021944/- not eligible for deduction u/s 10AA of the Income Tax Act, 1961. In DBITA No. 272/2017 “i) Whether on the facts and in circumstances of the case, the ITAT was justified in law in holding that surplus amount in the freight export account and in the insurance export of Rs. 2017500/- is derived from export activities and on those amounts deduction u/s 10AA is allowable. ii) Whether on the facts and in circumstances of the case, the ITAT has failed to appreciate the fact as brought on record by the Assessing Officer regarding disallowance of deduction u/s 10AA of deemed profit of Rs. 23314854/- not eligible for deduction u/s 10AA of the Income Tax Act, 1961. 4. Counsel for the appellant contended that the Tribunal has seriously committed an error in reversing the finding arrived at by the CIT(A) and after considering the case of the assessee has observed as under:- “4.3.1. I have perused the facts of the case, the assessment order and the submissions of the appellant. In the appellant company, both Shri Ashok Goyal and his wife hold 50% of the shares, each. The nature of business of the appellant company is manufacture of studded jewellery and its export. The appellant has claimed exemption u/s 10AA on this export turnover. Shri Ashok Goyal is also the proprietor of M/s Dwarka Jewels

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which is engaged also in the business of manufacture of studded jewellery and its sells them- both locally as well as for export. The profits of M/s Dwarka Jewels, are fully taxable. 4.3.2. M/s Dwarka Jewels has been engaged in the above business for a long time whereas the appellant company has started its business, a few years ago. The appellant company primarily purchases raw silver, silver Khokha, semi-precious stones from M/s Dwarka Jewels. It also gets job work of silver khokhas done from M/s Dwarka Jewels. During the year, the appellant has made purchases from M/s Dwarka Jewels of Rs. 5,76,86,690/- and it has got job work done from M/s Dwarka Jewels amounting to Rs. 10,48,172/- 4.3.3. The Assessing Officer found that the gross profit rate of Dwarka Jewels on its transactions with the appellant is much lower than gross profit rate with concerns other than the appellant. On the basis of a detailed discussion, given in para 4.5 of the assessment order, the Assessing Officer held that owing to the close connection between the assessee and M/s Dwarka Jewels, the business between them was so arranged that the business transacted between them produced to the assessee more than ordinary profit. The Assessing Officer therefore, invoked the provisions of Section 10AA(9) r.w.s. 80IA(10). The appellant has denied that there was any arrangement or that it enjoyed more than ordinary profit. 4.4. The issue which therefore, requires adjudication is whether the course of business between the appellant and Dwarka Jewels have been so arranged that these transactions have produced for the appellant more than ordinary profit which might be expected to arise. There are three aspects which require examination:- (a) whether there is a close connection between the appellant and M/s Dwarka Jewels (b) whether the course of business between the appellant and Dwarka Jewels has been arranged and (c) whether this arrangement has produced for the appellant more than ordinary profit which might be expected to arise.”

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between the assessee-company and the foreign buyer and it is not disputed that the other requirement such as the nature of arrangement and the manner of rejection of the profits margin due to export sales as inflated profits attributable to export activities, having not been disclosed by the Assessing Officer arid though considerable reliance is placed by the learned counsel for the respondent on the judgment of the Supreme Court, while it is true that to some extent these two provisions are analogous (S.42 and Section 80-I(9) of the Act) the questions that were examined in the judgment of the Supreme Court were not on the so-called arrangement aspect, but mainly as to the deeming provision operating against the resident or the non- resident and also as to the manner of business activity and existence of the business connection which argument on behalf of the assessee was negatived. “25. The course of business was so arranged that the business transaction between two units of the assessee which might expected to arise in the business undertaking or the hotel. The word ‘appears’ cannot be taken in isolation de hors the qualifying words or ‘so arranged’ with the business more than the ordinary profits. While on the first aspect there is not much dispute. The second requirement viz, it is a course of business is so arranged as to result in an inflated profit is not forthcoming from the order of the Assessing Officer and unfortunately for the Revenue the findings of the Appellate Authority which also go into the facts is that the profit margin as revealed by the assessee is a reasonable profit margin in comparison to other similar units. Ultimately, there being no material to indicate that the course of business had been so arranged as to inflate profits, i.e. to show a higher profit margin to answer the question in favour of the Revenue, but the only answer can be that the Tribunal was justified in taking this view and therefore, the first question is answered in the affirmative and in favour of the assessee and against the Revenue.” 5.10. In our view, what is relevant to determine and has to be examined, in the instant case, is the course of arrangement in the context of the business which has actually been transacted between this two entities during the year which has resulted in more than ordinary profits to the assessee company. The business transactions which have actually happened during the year under consideration relates to 70%

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of the purchases made by the assessee company from M/s Dwarka Jewels and the job work charges paid to M/s Dwarka Jewels. In the context of these two type of transactions, it has to be proved that there was an arrangement between these two entities or there was manipulation which was carried out and such a manipulation has to be shown to exist through demonstrable and credible evidence that these transactions were intentionally made at relatively lower rate than the rate prevailing in the market for the same products or the services availed by the assessee company. The assessee company has submitted before the lower authorities that prices charged by M/s Dwarka Jewels in respect of silver supplied to the assessee company is at the prevailing market price of the raw silver and similarly the job work charge in respect of silver Khokhas were also paid at the prevailing market price. The said facts are on records and have not been controverted by the lower authorities. Further, there is no independent exercise carried out by the AO to rebut the submissions of the assessee company. Once the assessee has demonstrated that the price charged for silver and job work charges is at prevailing market price, it is for the AO to either accept the same or in a scenario, where the AO is of the prima facie view that such prices are not the prevailing market prices and has some concerns in accepting the same, he has to bring on record comparable data involving purchase of similar products and services and the price prevailing in the open market. However, there is no such comparable data which has been brought on record by the Revenue. In absence of the same, there is no material which is available on record to demonstrate existence of an arrangement between these two entities which has resulted in more than normal profit. Hence, the provisions of section 80IA(10) cannot be invoked in the instant case. 5.11. There is another aspect of the matter which we have noted after review of the assessment records. The authorities below have compared the profit earned by M/s Dwarka Jewels and the profit earned by the assessee company to hold that since assessee is earning higher profits, the prices charged by M/s Dwarka Jewels is at a very low price which has resulted in exorbitant profits in the hands of the assessee company. This is again a wrong approach undertaken by the authorities. As we have stated above, the arrangement is a cause and the higher profit is the effect. The high profit must necessarily be the consequence of such an

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arrangement. The AO has to first show that the transactions were specially arranged to produce more than ordinary profits to the assessee company and the high profit is the end point of such an exercise. In absence of an arrangement, merely earning higher profits cannot be basis to invoke the provisions of section 80IA(10) of the Act. 5.12. Assuming that for sake of discussions, there existed an arrangement in respect of specified business transaction between these two connected entities, another aspect of the matter which has to be considered is what is the measure available and employed by the Revenue for determining more than normal profits in the hands of the assessee company. The authorities below have compared the profit earned by M/s Dwarka Jewels and the profit earned by the assessee company to hold that since assessee is earning higher profits, the prices charged by M/s Dwarka Jewels is at a very low price which has resulted in exorbitant profits in the hands of the assessee company. This is again a wrong approach undertaken by the authorities. What has to be seen and examined is the profits earned by unrelated third party entities engaged in the same or similar line of business of export of gems and jewellery and operating in the same or similar business conditions. And if there are variations in the profits reported by the assessee company and these unrelated third party entities, it could give a starting point to the AO to carry out further investigation, as we have held above, to examine whether there exist an arrangement or not. The assessee company has in fact submitted some comparable data in respect of Jagdish Prasad Soni and Green Fire Export to demonstrate that the profits reported are comparable. However, the same has not been examined by the lower authorities. On this account also, the contention of the Revenue cannot be accepted that the assessee has earned more than normal profits. 5.13 In light of above discussion and in the entirety of the facts and in the circumstances of the case, we are of the view that there is no evidence demonstrating the existence of any arrangement between the assessee company and M/s Dwarka Jewels aimed at producing more than normal profit in the hands of the assessee company. Hence, the action of the authorities in invoking provisions of section 10AA(9) read with section 80IA(10) cannot be sustained. In the result, the consequent additions made by the Assessing Officer and partly upheld by

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the ld. CIT(A) is hereby deleted. In the results, grounds taken by the assessee are allowed and ground of the revenue is dismissed. 6.1 Briefly the facts of the case are that the ld. A.O. disallowed the deduction u/s 10AA of Rs.20,17,500/- for A.Y. 2010-11 in respect of the amount comprising surplus of freight, Insurance charges and Misc. Balances w/off on the allegation that the same constituted indirect income not derived from export of goods. 6.8 The next question that arises for consideration is the definition of export turnover which has been defined in explanation 1 to section 10AA of the Act and whether the same would have any effect in the instant case. The term “export turnover” has been defined as consideration in respect of export by the undertaking, being article or thing received in or brought into India by the assessee but doesn’t include freight, telecommunication charges or insurance attributable to the delivery of the articles or things outside India. In our view, the same may not have any effect as where the freight or insurance charges are reduced from the export turnover, the same have to be reduced from the total turnover as well. The same has been the consistent stand of the various Coordinate Benches. 6.9 In light of above discussions and in the entirety of facts and circumstances of the case, we donot find any infirmity in the order of the ld CIT(A) and confirm the allowance of exemption under section 10AA in respect of freight and insurance excess receipts. On parity of reason, the same position would hold good for misc balances written off. In the result, the ground no.1 of the revenue is dismissed. 8. We are in complete agreement with the view taken by the Tribunal. 9. The findings arrived at by the Tribunal is just and proper. No substantial question arises in the appeals. 10. Hence, the appeals stand dismissed. (VIJAY KUMAR VYAS)J. (K.S. JHAVERI)J.

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A.Sharma/41-42