MURPHY LIGHTING,JAIPUR vs. ITO, JAIPUR

PER BHAGCHAND, AM

The assessee has filed an appeal against the order of the ld.

CIT(A)-2 , Jaipur dated 25-08-2016 for the assessment year 2012-13

raising following grounds of appeal.

2 ITA No.878/JP/2016 M/s. Murphy Lighting s ITO, Ward- 4(3), Jaipur by AO and thereby allowing the deduction at Rs.25,65,237/- as against Rs.36,15,771/- claimed by the assessee.’’ 2.1 Apropos Ground No. 1 and 2 of the assessee, the facts as emerges

from the order of the ld. CIT(A) is as under:-

‘’ I have perused the facts of the case, the assessment order and the submissions of the appellant. The facts of the case are that the assessee during the year was in trading and manufacturing of electrical bulb and CFL and their components. On a turnover of Rs. 85,85,52,789/- a gross profit of 47.33% was declared against 45.03% declared in the previous year. During the year, the assessee claimed a deduction of Rs. 36,15,771/- u/s 80IC of the I.T. Act, 1961. The AO examined the books of accounts, audit reports alongwith profit and loss account and copis of books of account of the assessee firm and its sister concern, M/s. Fairdeals which deals in the same business i.e. trading and manufacturing of electric bulbs, CFL, LED lights and other components. Importantly, it has noticed that during the year under consideration, the assessee firm purchased almost 65% of raw material from its sister concern and all finished goods were sold to the sister concern. The sister concern has shown net profit of 0.094% on a turnover of Rs. 4.4 crores while assessee company has shown 43.50% on a turnover of Rs. 85 lakhs. Considering the above facts and examination of accounts of two concerns, the Assessing Officer proceeded to apply provisions of Section 80IA of the I.T. Act, 1961 and afforded an opportunity to the assessee to explain the same. The assessee’s submission and Assessing Officer’s conclusions are reproduced at pages 2 to 5 of this order. The Assessing Officer, thus applied the provisions of Section 80IA(10) and estimated the net profit of the assessee on the basis of consolidated net profit and consolidated turnover of both firms and allowed the deduction u/s 80IC on Rs. 6,08,816/- and disallowed the balance.

The Assessing Officer during the examination of details furnished noticed that assessee firm and sister

3 ITA No.878/JP/2016 M/s. Murphy Lighting s ITO, Ward- 4(3), Jaipur concern deal in the same nature of business i.e. trading and manufacturing of electrical bulbs, CFL, LED Lights etc. Further the assessee firm had purchased almost 65% of raw material from the sister concerns and all the finished goods were sold to the sister concern. The authorised representative has tried to explain that in the previous years profit percentage was better and that transactions between the two concerns is at the similar rate as with other concerns hence the business is not arrange so as to result in arising of more than ordinary profits to the eligible business and hence, the provisions of Section 80IA(10) would not be applicable.

I have examined the details furnished by the assessee. The fact that both units deal in similar business even though the production, as per authorized representative, in the assessee company is only of LED bulbs which is an innovative product, is a fact. Further, there is regular purchase and sale of components and finished products between the two concerns. During the year 60.25% of raw material purchase are from sister concern and entire sales which include semi finished goods, are to the sister concern. It was submitted that the sister concern deals in traditional products, products are subject to CST and excise duty of about 7%, administration and other expenditures are more, there is an interest burden which is substantial part of the expenditure and the turnover is Rs. 4.4 crores as compared to Rs.85,50,789/- in the assessee company. I have also perused the details submitted to prove that sales and purchase have been made on similar rates to the sister concern and the other concerns. It is seen that these details do not present comparable cases where prices are compared the quantities are vastly different for e.g. 8100 number of printed circuit boards are being compared with the transaction for Rs.52,560/- boards. Similarly, the months of transaction are different and in such situation it cannot be given much credence. The two concerns deal in similar products, the partners and management in both the concerns are same, there are transactions of sale and purchase and in fact in the year under consideration entire sale is to the sister concern as it was submitted that assessee company stopped

4 ITA No.878/JP/2016 M/s. Murphy Lighting s ITO, Ward- 4(3), Jaipur production after this year. The sale price is also not comparable as goods sold are at various stages of completion and it is not possible to verify the correction of the valuation. The wide difference in net profit at 43.50% and 0.095%does not get explained by factors pointed out by the authorized representative and discussed by me above. In view of the same, provisions of section 80IA(10) are applicable. Now coming to the percentage of profits which can reasonably be said to be derived from the eligible business, after taking into consideration factors discussed earlier, will be 30% instead of 43.50% returned by the assessee. The AO to modify the deduction u/s 80IA accordingly.”

Consequently, the ld. CIT(A) held that provisions of Section 80IA(10)

are applicable on the assessee but the percentage of profits will be 30%

instead of 43.50% returned by the assessee and accordingly the AO will

modify the deduction u/s 80IA of the Act.

2.2 During the course of hearing, the ld. AR of the assessee prayed to

accept the net profit rate declared by the assessee and allow deduction u/s

80IA accordingly. The ld. AR of the assessee filed the following written

submission which has been taken into consideration. Submission:-

‘’1. The provision of section 80IC(7) read with section 80IA(10) reads as under:- “Where it appears to the Assessing Officer that, owing to the close connection between the assessee carrying on the eligible business to which this section applies and any other person, or for any other reason, the course of business between them is so arranged that the business transacted between them produces to the assessee more than the ordinary profits which might be expected to arise in such eligible business, the Assessing Officer shall, in computing the profits and

5 ITA No.878/JP/2016 M/s. Murphy Lighting s ITO, Ward- 4(3), Jaipur gains of such eligible business for the purposes of the deduction under this section, take the amount of profits as may be reasonably deemed to have been derived therefrom.”

From the above provision, it can be noted that:

(a) Two conditions, ‘close connection’ and ‘arranged’, need to be cumulatively satisfied for invoking the provisions of section 80IC read with section 80-IA(10) of the Act.

(b) Merely because extra-ordinary profit has beenmade, it would not lead to aconclusion that the businesstransaction was ‘arranged’ forthe purpose of claiminghigher deduction undersection 80IC of the Act.

© The AO is to bring material on record that business has been arranged to produce more than ordinary profit to the unit claiming deduction u/s 80IC.

(i) It may be noted that in the first year of the manufacturing of the LED bulb by the Baddi Unit i.e. in A.Y. 2011-12, the Baddi unit declared a gross profit rate of 55.74% on turnover of Rs.66,17,314/-. In this year, the Baddi unit purchased raw material of Rs.15,04,194/-, from its associate concern M/s Fairdeals out of the total raw material of Rs.34,49,774/- purchased by it which constituted 43.60% of the total purchases. The raw material purchased by it from M/s Fairdeals is comparable with the rate at which it was purchased from the other parties as per details placed at PB 9-12. The sales made in this year to M/s Fairdeals was Rs.15,03,778/- out of total sales of Rs.66,17,314/- which constituted 22.72 % of the total sales. From the details of sales placed at PB 13, it can be noted that the Baddi unit has sold the goods to non associate concern namely Indo Asian Fusegear Ltd. @ Rs. 25.48 per bulb and HPL Electric and Power Pvt. Ltd. @ Rs. 22.77 per bulb giving an average rate of Rs.24.12 per bulb whereas the same goods has been sold to M/s Fairdeals @ Rs. 22 to Rs. 23 per bulb. From these details it is evident that in A.Y. 2011-12 the goods purchased from/sold to M/s Fairdeal was at a market rate and in that year the gross profit of the assessee was 55.74% and the net profit rate was 48.11%. Therefore, the gross profit of 47.33% and net profit of 43.5% which is lower than the gross profit and net profit declared in the last year can’t be said to be an arrangement between the assessee

6 ITA No.878/JP/2016 M/s. Murphy Lighting s ITO, Ward- 4(3), Jaipur and M/s Fairdeals to shift the profit with an intention to claim higher deduction u/s 80IC.

The AO, however, has not accepted this contention only for the reason that in A.Y. 2011-12, assessee made sales of 22.72% of the total sales to M/s Fairdeals whereas during the year entire goods were sold to M/s Fairdeals. In holding so he ignored the fact that the per unit rate of Led bulb charged from M/s Fairdeals in last year was 22 to 23 per bulb whereas it was more from the non associate concerns. In this year the rate charged from M/s Fairdeals is lower than that charged in the previous year. Therefore, only because the entire goods were sold to M/s Fairdeals during the year as against 22.72% in the last year can’t lead to a conclusion that assessee has earned extra ordinary profit from its dealing with M/s Fairdeals. In fact both the gross profit and the net profit during the year is lower as compared to the last year and therefore there can’t be a charge of shifting of profit for claiming higher deduction u/s 80IC.

(ii) In the year under consideration assessee has declared G.P. Rate of 47.33% on turnover of Rs.85,50,789/-. In this year assessee has purchased raw material of Rs.16,91,516/- from M/s Fairdeals out of total purchase of Rs.28,07,364/- which constituted 60.25% of its total purchase. The rate at which purchase is made by the assessee from M/s Fairdeals is at market rate as is evident from the chart placed at PB14 submitted before the AO from which it can be noted that the rate of purchases of various items from M/s Fairdeals is at same rate or at a higher rate when compared to the purchase of the same item from other parties.A statement indicating the rate at which purchases are made by M/s Fairdeals and the rate at which it was sold to assessee is also placed at PB 14submitted to the AO from which also it is evident that purchase made by the assessee from M/s Fairdeals is at market price.

The AO without finding any defect in the rate at which purchases are made from M/s Fairdeals and other parties has not accepted the contention for the reason that the date of purchase from M/s Fairdeals is different than the date of purchase from the other parties. However, he has not brought any evidence on record to prove that the rate at which the assessee purchased the goods from M/s Fairdeals on a particular date was lower. Therefore it can’t be concluded that M/s Fairdeals has shifted its profit to the assessee for claiming higher deduction u/s 80IC.

(iii) The assessee has sold the entire goods during the year to M/s Fairdeals. The sale is of raw material, semi-finished goods and finished goods. The detail of sales is placed at PB 15 was submitted

7 ITA No.878/JP/2016 M/s. Murphy Lighting s ITO, Ward- 4(3), Jaipur to the AO.From the same it can be noted that assessee has sold the unconsumed raw material of Rs.81,291/- to M/s Fairdeals at the same rate at which it was purchased from M/s Fairdeals. This fact has been accepted by the AO himself. The assessee sold finished goods of Rs.9,36,353/- (LED light) @ Rs. 23 per bulb which is at the same rate at which it was sold in the last year and was comparable to the rate at which it was sold to other parties.The remaining sales of Rs.75,33,145/- is of semi-finished goods. The same is sold at different rate depending upon the stage of completion. For example, assembled PCB for LED light without leg cutting was sold in the month of September @ Rs. 12 per piece but because the assessee had to wind up the unit, it was sold at Rs. 10 per piece in the month of March. Same is the position in respect of assembled PCB for LED lights with cap which was sold @ Rs. 16 per piece but subsequently @ Rs. 13 per piece. The assembled PCB for LED after leg cutting was sold at Rs. 14 per piece. These rates are at market rate/lower than market rate considering the fact that the rate of finished bulb is Rs. 23 per bulb and the cost involved in making the semi-finished goods to finished goods is between Rs. 3.60 to 5.23 per piece as per the details placed at PB 16 submitted before the AO. If this cost is reduced from sale rate of finished goods of Rs.23 per bulb, the sale value of semi finished goods works out at Rs. 18 to 19 per piece whereas it is sold @ Rs.10 to 16 per piece. This proves the rate at which semi finished goods are sold to M/s Fairdeal is even lower than the market rate. It is for this reason that the G.P. rate of 47.33% and N.P. rate of 43.50% is lower as compared to the G.P. rate and N.P. rate declared in the last year even when the volume of purchase and sale with M/s Fairdeals is higher during the year as compared to last year. All these shows that the transactions made with M/s Fairdeals is at market rate and the allegation that by making transaction with M/s Fairdeals super profit is earned to claim deduction u/s 80IC is incorrect.

The AO accepted that the raw material was sold by the assessee to M/s Fairdeals at the same rate at which it was purchased. However in respect of finished goods and semi finished goods he held that the contention of the assessee is not tenable as the rate at which these goods were sold to M/s Fairdeals could not be verified in absence of any sales made by the assessee to other parties. However at the same time the AO has not brought on record any evidence that the market rate of the goods sold by the assessee to M/s Fairdeals was lower than the rate at which it was sold to M/s Fairdeals. Therefore without bringing any material on record, it can’t be presumed that assessee has sold goods to M/s Fairdeals at a higher rate to earn super profit with the intention to claim higher deduction u/s 80IC.

8 ITA No.878/JP/2016 M/s. Murphy Lighting s ITO, Ward- 4(3), Jaipur (iv) The AO has worked out the consolidated net profit rate of the assessee and M/s Fairdeals at 7.12% and applied such N.P. rate to the turnover of the assessee, thereby estimating the net profit of the assessee at Rs.6,08,816/- as against Rs.36,15,771/- declared by the assessee and thereby disallowed the claim of deduction u/s 80IC at Rs.30,06,955/-. The entire working made by the AO is incorrect. This is for the reason that firstly M/s Fairdeals does not deal in LED bulb only. It deals in various items i.e. CFL, GLS Bulb, PL, Reflector Bulb, Infrared Bulb etc. which are traditional product where there is lot of competition and the margin is much less as compared to the LED bulb which was a new and innovative product at that point of time. This is also evident from the list of inventory mentioned in the tax audit report. Secondly, the turnover of M/s Fairdeals is Rs.443 lacs whereas assessee’s turnover is only Rs. 85 lacs that too mainly of semi-finished goods. Thirdly, application of consolidated N.P. rate is not justified in as much as the purchase/sale transaction with M/s Fairdeals relates to the trading account only and there is no expenditure relating to the assessee which is incurred by M/s Fairdeals. Moreover, due to the large scale of operations, the indirect expenses like salary, maintenance, etc. are much higher of M/s Fairdeals in comparison to the assessee, further reducing its N.P. rate.Therefore what is relevant is the G.P. rate and not the N.P. rate. Further the profit rate of the assessee is higher than M/s Fairdeals as the assessee’s unit at Baddi was exempted from Excise duty and the CST was applicable @ 1% whereas M/s Fairdeals is liable to Excise Duty @5%/6% and CST @ 2%. Therefore the benefit of these levies has resulted in better margin for the assessee as compared to M/s Fairdeals. Therefore applying consolidated N.P. rate of the assessee and M/s Fairdeals to the turnover of the assessee to estimate its profit is fallacious and incorrect.

The AO has not accepted the above contention by incorrectly holding that both the firms are engaged in the same nature of business whereas it is a fact on record that assessee is engaged only in LED bulbs whereas M/s Fairdeals is dealing in all varieties of bulb as stated above. Further the g.p. rate/net profit rate of M/s Fairdeals can’t be compared with that of the assessee considering the turnover, location, tax benefits, administrative set up, nature of products dealt etc. The AO has not brought any evidence on record that any of the purchase made by the assessee from M/s Fairdeals is at lower than the market rate or any of the sales made by the assessee to M/s Fairdeals is at higher than the market rate. Hence without evidence it can’t be presumed that the course of business between the assessee and M/s Fairdeals has been so arranged that it produces more than ordinary profit to the assessee.

9 ITA No.878/JP/2016 M/s. Murphy Lighting s ITO, Ward- 4(3), Jaipur transaction with M/s Fairdeals are at market rate. AO has not brought any material or evidence on record to prove that these transactions are not at market rate. Therefore, only by making theoretical observations, it can’t be presumed that the dealings between the assessee and M/s Fairdeals has been arranged so as to produce more than extraordinary profit to the assessee. It is pertinent to mention that the g.p. rate and the n.p. rate declared by the assessee in A.Y. 2011-12 has been accepted. In the year under consideration the g.p. rate and n.p. rate declared by the assessee is lower as compared to the last year. Reliance in this connection is placed on the following cases:- 1. CIT Vs. Delhi Press PatraPrakashan(2013) 355 ITR 0001 (Delhi)(HC) [PB 73-80] 2. Honeywell Automation India Ltd. Vs. DCIT (2015) 43 CCH 0371 (Pune)(Trib.) [PB 81-83] 3. A.T. Kearney India Pvt. Ltd. Vs. ACIT (2014) 41 CCH 0418 (Del)(Trib.) [PB 84-90] 4. Aquila Software Service Hyderabad (P.) Ltd. Vs. DCIT 42 ITR (Trib.) 0630 (Hyd.) (Trib.) [PB 91-95]

10 ITA No.878/JP/2016 M/s. Murphy Lighting s ITO, Ward- 4(3), Jaipur be said to be an arrangement by which extraordinary profit is declared to claim higher deduction u/s 80IC. The Ld. CIT(A) is therefore not correct in directing that the profit of the assessee be worked out by applying N.P. rate of 30% for allowing deduction u/s 80IA. In view of the above, the AO be directed to accept the N.P. rate declared by the assessee and allow deduction u/s 80IA accordingly. ‘’

2.3 On the other hand, the ld. DR relied on the orders of the authorities below. 2.4 I have heard the rival contentions and perused the materials

available on record. Brief facts of the case are that the assessee firm is

engaged in the business of trading and manufacturing of electrical bulbs

and CFL and their components. During the year under consideration , the

total turnover of Rs. 85,52,789/-, gross profit of Rs. 40,48,319/- resulting

into gross profit rate of 47.33% has been declared by the assessee. It is

noted that assessee submitted the books of accounts , consisting of cash,

journal ledger, bank books, purchase and sales vouchers, bills and

vouchers for expenses were produced and they were put to test check by

the AO. It is also noted from the records that the assessee claimed 100%

deduction u/s 80IC on the net profit declared by it at its branch office at

Baddi. On perusal of the details filed by the assessee, the AO observed

that the assessee as well as its sister concern M/s Fairdeals are dealing in

the same nature of business i.e. trading and manufacturing of electrical

bulbs, CFL, LED lights and their components. During the year, assessee

11 ITA No.878/JP/2016 M/s. Murphy Lighting s ITO, Ward- 4(3), Jaipur has purchased almost 65% of raw materials from its sister concern M/s

Fairdeals and all the finished goods were sold to them. The assessee has

shown a net profit of Rs.37,19,701/- giving n.p. rate of @43.50% on the

turnover of Rs.85,50,789/- whereas M/s Fairdeals has shown a net profit

of Rs.41,954/- on the turnover of Rs.4,43,02,101/- giving n.p. rate of

0.094%. The AO, therefore, applied the provisions of section 80IA(10)

and proposed to estimate the net profit of the assessee firm by applying

the combined net profit rate of 7.12% declared by the assessee and its

sister concern. Accordingly, he applied the consolidated net profit rate of

7.12% on the turnover of the assessee as against the net profit rate of

43.50% declared by the assessee and determined the net profit of the

Baddi unit at Rs.6,08,816/- and restricted the claim of deduction u/s 80IC

to that extent as against Rs.36,15,771/- claimed by the assessee resulting

into disallowance of claim of deduction u/s 80IC by Rs.30,06,960/-.In

first appeal, the ld. CIT(A) confirmed the action of AO in holding that

provisions of section 80-IA(10) are applicable. However, she held that

profit of the assessee be determined by applying N.P. rate of 30% as

against N.P. rate of 43.5% claimed by the assessee, thereby allowing the

deduction u/s 80IC at Rs.25,65,237/-. Taking into consideration all the

factual aspects of the case, it is well establishes that there is sufficient

12 ITA No.878/JP/2016 M/s. Murphy Lighting s ITO, Ward- 4(3), Jaipur material to establish the close of nexus between the assessee and M/s. Fairdeals in manipulating the profit to claim higher rate of deduction u/s 80IA of the Act. The major part of raw materials were purchased from sister concern M/s. Fairdeals and total sales were also made to it. Such arrangements have been made to inflate profit of assessee and claim higher 80IC deductions and avoid the tax payments. In my considered view, the ld. CIT(A) was fair enough to give sufficient relief to the assessee and there is no further scope for any giving any relief to the assessee. Thus the appeal of the assessee is dismissed. 3.0 In the result, the appeal of the assessee is dismissed. Order pronounced in the open court on 27 /02/2017. Sd/- ¼HkkxpUn½ (Bhagchand) ys[kk lnL;@Accountant Member Tk;iqj@Jaipur fnukad@Dated:- 27 /02/ 2017 *Mishra आदेश की प्रतिलिपि अग्रेषित@ब्वचल वf जीम वतकमत वितूंतकमक जवरू 1. vihykFkhZ@The Appellant- M/s. Murphy Lighting, Jaipur izR;FkhZ@ The Respondent- The ITO, Ward- 4(3), Jaipur 2. vk;dj vk;qDr¼vihy½@ CIT(A). 3. 4. vk;dj vk;qDr@ CIT, विभागीय प्रतिनिधि] आयकर अपीलीय अधिकरण] जयपुर@क्त्ए प्ज्Aज्ए Jंपचनत 5. 6. xkMZ QkbZy@ Guard File (ITA No. 878/JP/2016) vkns'kkuqlkj@ By order,

सहायक पंजीकार@ Aेेपेजंदज. त्महपेजतंत