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Income Tax Appellate Tribunal, “J” BENCH, MUMBAI
Before: SHRI SAKTIJIT DEY & SHRI RAJESH KUMAR
M/s. Rosy Blue (India) Pvt. Ltd. 1608/09, Prasad Chambers ……………. Appellant Opera House, Mumbai 400004 PAN – AACCR2413B v/s Dy. Commissioner of Income Tax ……………. Respondent Circle–8(3), Mumbai Assessee by : Shri Nitesh Joshi Revenue by : Shri Chandra Vijay Date of Hearing – 10.02.2021 Date of Order – 16.02.2021
O R D E R PER SAKTIJIT DEY. J.M.
The captioned appeal has been filed by the assessee challenging order dated 14th February 2019, passed by the learned Commissioner of Income Tax (Appeals)–57, Mumbai, for the assessment year 2014– 15.
In ground no.1, the assessee has challenged the addition made of ` 22,68,928, on account of arm's length interest on loans advanced to the Associated Enterprises (AE).
2 M/s. Rosy Blue (India) Pvt. Ltd.
Brief facts are, the assessee is a resident company engaged in manufacturing of cut and polished diamonds. During the year under consideration, the assessee had entered into international transactions with its overseas AEs. In the course of proceedings before him, the Transfer Pricing Officer noticed that the assessee has advanced loans to two of its AEs situated in Hong Kong and United Arab Emirates (UAE) for capital funding of the subsidiary. However, such loans were advanced without charging any interest. Being of the view that such interest free loans would not have been advanced to third parties, the Transfer Pricing Officer proceeded to determine the arm's length interest and proposed an adjustment of ` 56,19,348. The adjustment proposed by the Transfer Pricing Officer was added back to the income of the assessee.
The assessee contested the aforesaid addition before learned Commissioner (Appeals). After considering the submissions of the assessee in the light of the decisions relied upon, learned Commissioner (Appeals) directed the Assessing Officer to determine the arm's length interest applying LIBOR rate.
Reiterating the stand taken before the departmental authorities, learned Counsel for the assessee submitted, since advancing of loan to overseas subsidiaries for contributing capital is a shareholder’s
3 M/s. Rosy Blue (India) Pvt. Ltd. activity, it cannot be considered to be an international transaction of the nature defined in section 92B of the Act.
The learned Departmental Representative strongly relied upon the observations of learned Commissioner (Appeals).
We have considered rival submissions and perused materials on record. Though, learned Counsel for the assessee has submitted that advancing of interest free loans to the subsidiaries is a shareholder’s activity, hence, should not be subjected to arm's length price determination, however, we are not convinced. A perusal of Explanation–I(c) of section 92B of the Act makes it clear that capital financing including any type of long term and short term borrowing, lending, etc., comes within the ambit of international transaction. Since, the assessee has provided interest free loan to the AEs, which, under similar circumstances would not have been provided to unrelated parties, arm's length interest has to be determined. It is further observed, in the course of proceedings before the first appellate authority the assessee relying upon various judicial precedents had submitted that arm's length interest should be determined by applying LIBOR rate. Since, learned Commissioner (Appeals) has accepted the aforesaid contention of the assessee, we do not find any infirmity in the decision of learned Commissioner (Appeals). This ground is dismissed.
4 M/s. Rosy Blue (India) Pvt. Ltd.
In ground no.2, the assessee has challenged the addition made of ` 13,04,860, on account of adjustment made towards fee on corporate guarantee.
Brief facts are, during the transfer pricing proceedings, the Transfer Pricing Officer found that the assessee has provided corporate guarantee on behalf of its AEs towards loan availed by them from Barclays Bank and ABN Amro Bank. Since, the assessee had not charged any commission/fee from the AEs for the corporate guarantee so provided, the Transfer Pricing Officer determined the fee/commission for corporate guarantee @ 1.25% on the quantum of loan availed and proposed an adjustment of ` 32,62,150.
In appeal proceedings, learned Commissioner (Appeals) directed the Assessing Officer to determine the commission on corporate guarantee @ 0.5% on the loans availed.
Before us, the learned Counsel for the assessee submitted, the provision of corporate guarantee being a shareholder’s activity will not come within the ambit of international transaction as defined under section 92B of the Act. Without prejudice, he submitted, the commission on corporate guarantee should be reduced to 0.2% as against 0.5% determined by learned Commissioner (Appeals). In this context, he relied upon the decision of the Hon'ble Jurisdictional High
5 M/s. Rosy Blue (India) Pvt. Ltd.
Court in CIT v/s Asian Paints (India) Ltd., [2016] 75 Taxman.com 152 (Bom.).
The learned Departmental Representative strongly relied upon the observations of learned Commissioner (Appeals).
We have considered rival submissions in the light of decision relied upon and perused material on record. As far as the contention of learned Counsel for the assessee that provision of corporate guarantee is not an international transaction, we are not convinced with it. A reading of Explanation–1(c) of section 92B of the Act, makes it clear that the provision of any kind of guarantee will come within the ambit of international transaction under section 92B of the Act. Further, as rightly observed by learned first appellate authority, the Tribunal, Mumbai Bench, in Everest Kanto Cylinders Ltd. v/s DCIT, [2013] 34 Taxman.com 19 (Mum.) while negating identical contention made by the assessee has held that provision of corporate guarantee is an international transaction. The aforesaid decision of the Co–ordinate Bench has also been upheld by the Hon'ble Jurisdictional High Court in case of the same assessee as reported in [2015] 58 Taxman.com 254 (Bom.). That being the case, we do not find any merit in the submissions of the assessee that provision of corporate guarantee is not an international transaction. As regard the arm's length rate of fee/commission, the learned Counsel for the assessee relying upon the 6 M/s. Rosy Blue (India) Pvt. Ltd.
decision of the Asian Paints India Ltd. (supra) has submitted that it should be reduced to 0.2%. However, on careful perusal of the decision rendered in case of Asian Paints (supra), we find that in the facts of the said case the assessee itself had charged commission @ 0.2% over the years and the Tribunal has accepted the claim of the assessee which was not contested by the Revenue. Taking note of these facts the Hon'ble Jurisdictional High Court has dismissed the appeal of the Revenue. These are not the facts in case of the present assessee. Therefore, we are not inclined to interfere with the decision of learned Commissioner (Appeals) on this issue. This ground is dismissed.
In ground no.3, the assessee has challenged the disallowance made on account of alleged non–genuine purchases.
Brief facts are, in the course of assessment proceedings, the Assessing Officer noticed that some of the purchases shown by the assessee were from two entities which are part of Rajendra Jain Group. He observed, in the course of a search and seizure operation conducted in case of Rajendra Jain Group it was found that the said group through various entities was providing accommodation entries by way of bogus purchase bills. On the basis of such information, the Assessing Officer called upon the assessee to prove the genuineness of purchases aggregating to ` 43,90,781. In response to the query
7 M/s. Rosy Blue (India) Pvt. Ltd. raised, the assessee furnished some documentary evidences, such as, ledger account of the concerned parties, purchase invoices, bank statements showing payment made towards purchases, sale invoices showing corresponding sale, quantitative details of purchase and sales of the cut and polished diamonds purchased from the concerned entities. Further, to verify the genuineness of these purchases the Assessing Officer issued notices under section 133(6) of the Act to the concerned parties. As observed by the Assessing Officer, in response to such notices one of the party, M/s. Nayan Gems furnished its reply along with documentary evidences confirming the sales made to the assessee. The Assessing Officer, however, was not convinced with the evidences furnished. Further, he noticed that while completing assessments for Assessment Year 2006–07 and 2012–13 the Assessing Officer had held the purchases made from the very same parties as non–genuine and has disallowed 5% of such purchases. Following the decision taken in earlier assessment years, the Assessing Officer disallowed 5% out of the purchases made, thereby, making an addition of ` 2,19,539. Though, the assessee contested the aforesaid addition before learned Commissioner (Appeals), however, it was unsuccessful.
The learned Counsel for the assessee submitted, the assessee has furnished all documentary evidences to prove the genuineness of 8 M/s. Rosy Blue (India) Pvt. Ltd.
purchases. He submitted, even in response to the notices issued under section 133(6) of the Act, one of the parties has confirmed the purchases made by the assessee. He submitted, during the year under consideration, the assessee had declared a turnover of ` 3,263 crore. Therefore, for such a petty amount of ` 43 lakh and odd, the assessee would not indulge in availing accommodation bills. Thus, he submitted, the addition made should be deleted. In support of his contention, the learned Authorised Representative relied upon the following decisions:– i) CIT v/s Nikunj Exim Enterprises Ltd., 372 ITR 619 (Bom.); ii) PCIT v/s Saporji Palonji Co. Ltd., 117 Taxman.com 625 (Bom.); iii) PCIT v/s Unipax India, 108 taxmann.com 454; and iv) PCIT v/s Vaman International Pvt. Ltd., (Bom.)
The learned Departmental Representative strongly relined upon the observations of the Assessing Officer and learned Commissioner (Appeals).
We have considered rival submissions in the light of the decisions relied upon and perused material on record. The factual matrix reveals that the two of the entities from whom the assessee had purchased diamonds of ` 43,19,781, were found to be part of Rajendra Jain Group. The details of such purchases are as under:–
9 M/s. Rosy Blue (India) Pvt. Ltd.
Nayan Gems ` 17,80,846 Sun Diam ` 26,09,935 Total ` 43,90,781 19. According to the Assessing Officer, in a search and seizure operation conducted in case of Rajendra Jain Group, it was unearthed that the entities belonging to the said group, without entering into any actual transaction, are providing accommodation bills. In fact, the authorised person of the said group is stated to have admitted this fact. However, as per Para–9.2 of the assessment order, only Sun Diam appears to be part of the Rajendra Jain Group. Whereas, Nayan Gems belongs to Shri Sanjay Choudhary. It is further to be noted that in response to the notices issued under section 133(6) of the Act, M/s. Nayan Gems furnished its reply along with documentary evidences confirming the sales made to the assessee. Whereas, there was no response from Sun Diam. It is evident, the Assessing Officer has not carried out any further enquiry in respect of M/s Nayan Gems to establish on record that the purchases from the said party are non– genuine. Thus, as far as M/s. Nayan Gems is concerned, in our considered opinion, keeping in view the documentary evidences filed by the assessee and the reply/information received from Nayan Gems, the purchases can be considered to be genuine by giving a benefit of doubt to the assessee. However, the same is not the case with the purchases made from Sun Diam. Though, it may be a fact that the assessee has furnished some documentary evidences to prove the 10 M/s. Rosy Blue (India) Pvt. Ltd. purchases, however, they are not conclusive evidence to prove the source of purchase. Thus, it can be concluded that the assessee purchased the goods from some other source. Therefore, to that extent, the genuineness of purchases made from Sun Diam still remains in doubt. In view of the aforesaid, to take care of any leakage of revenue on account of suppression of profit from the alleged purchases from Sun Diam the profit element embedded in such purchases has to be treated as income of the assessee. Having held so, it has to be decided what should be the reasonable rate of profit which can be applied. As noticed, the Assessing Officer has referred to a report of the task group for Diamond sector published by the Government of India, Ministry of Commerce and Industry, New Delhi, wherein the benign / presumptive taxation threshold was set at 2.5%. Keeping in view the aforesaid threshold limit set by the task group, in our considered opinion the reasonable profit element on the alleged non–genuine purchases can be estimated @ 3%. Therefore, we direct the Assessing Officer to restrict the disallowance to 3% on the purchases made from Sun Diam only. No disallowance should be made on the purchases made from Nayan Gems. Before parting, we must observe that on a careful examination of the decisions relied upon by the learned Counsel for the assessee, we found them to be not applicable to the facts of the present case, hence, we have not deliberated upon them at length. This ground is partly allowed.
11 M/s. Rosy Blue (India) Pvt. Ltd.
In the result, appeal is partly allowed. Order pronounced on 16.02.2021