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IN THE INCOME-TAX APPELLATE TRIBUNAL “K” BENCH MUMBAI BEFORE SHRI R.C. SHARMA, ACCOUNTANT MEMBER & SHRI PAWAN SINGH, JUDICIAL MEMBER ITA No.2166/Mum/2015 (Assessment Year 2010-11) M/s Kaybee Private Limited ITO-10(1)(3) 301, ‘A’ Wing, Solaris-1, Room No. 25 B, Ground Saki Vihar Road, Andheri (E), Vs. Floor, Aayakar Bhavan, Mumbai-400072. Mumbai (erstwhile PAN: AAACK1715H jurisdictional ITO-8(2)(2), Mumbai. Appellant Respondent ITA No.2167/Mum/2015 (Assessment Year 2011-12) M/s Kaybee Private Limited ITO-10(1)(3) 301, ‘A’ Wing, Solaris-1, Room No. 25 B, Ground Saki Vihar Road, Andheri (E), Vs. Floor, Aayakar Bhavan, Mumbai-400072. Mumbai (erstwhile PAN: AAACK1715H jurisdictional ITO-8(2)(2), Mumbai. Appellant Respondent Appellant by : Shri Madhur Agarwal (Advocate) Respondent by : Shri Jayant Kumar with Shri V. Jenerdhanan (CIT-DR) Date of Hearing : 28.05.2018 Date of Pronouncement : 08.08.2018
ORDER UNDER SECTION 254(1)OF INCOME TAX ACT PER PAWAN SINGH, JUDICIAL MEMBER; 1. These two appeal by assessee are directed against the order of ld.
Commissioner of Income-tax (Appeals)-17, Mumbai [ld. CIT(A)] dated
30.01.2015 for Assessment Years 2010-11 & 2011-12 respectively. For
Assessment Year 2010-11, the assessee has raised the following grounds of
appeal:
Each of the grounds /sub-grounds of appeal is independent and without prejudice to each other.
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The Ld. CIT(A) grossly erred, in fact and in law, in upholding the Ld AO's action (a) In determining the arm's length price u/s 92C(3) of the Act without issuing mandatory notice in terms of proviso to section 92C of Act. (b) In not furnishing, by way of show cause notice, the material or document or information on which he relied for invoking section 92C(3) of the Act and for computing the arm's length price thereunder. 2. The Ld. CIT(A) grossly erred, in fact and in law, in upholding that M/s. Kaybee Exim Pte Ltd, Singapore ('KEPTL') is an Associated Enterprise ('AE') of the appellant within the meaning of that term under section 92A of the Act. 3. The Ld. CIT(A) grossly erred, in fact and in law. in upholding the arm's length brokerage rate for yarn product at 2% as determined by Ld. AO as against 0.75% actually received by the appellant. (a) The Ld. CIT(A) grossly erred in not appreciating that the comparable instance of 2% brokerage rate adopted by Ld. AO cannot be taken as a comparable instance because it is appellant's own alleged international transaction with its alleged AE and hence it does not represent an arm's length price as defined u/s 92F(ii) of the Act. (b) 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. The Ld. CIT(A) grossly erred, in fact and in law, in upholding the upward transfer pricing adjustment at Rs 2,44,21,228/- instead of correct transfer pricing adjustment of Rs 2,13,08,695/- even following the yarn brokerage rate of 2% as determined by the Ld. AO, given that the shipment value of yarn in AY 2010-11 was Rs 1,70,46,95,6681- (equivalent to USD 3,61,25,268/-) and appellant had already received yarn brokerage of Rs 1,27,85,217/- (equivalent to USD 2,70,939/-) thereon. 5. The Ld. CIT(A) grossly erred, in fact and in law, in not allowing the benefit of arm's length range of +/- 5% provided in proviso to section 92C(2) of Act. 6. The Ld. CIT (A) grossly erred, in fact and in law, in upholding the disallowance of Rs.1,06,079/- in respect of society charges and property tax paid by the Appellant for the premises from where it conducts its business, even though same are incurred for business purposes and are fully allowable expense under section 37 of the Act.
For Assessment Year 2011-12, the assessee has raised the following grounds
of appeal:
Each of the grounds I sub-grounds of appeal is independent and without prejudice to each other.
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The Ld. CIT(A) grossly erred, in fact and. in law, in upholding the Ld AO's action (a) In determining the arm's length, price u/s 92C(3) of the Act without issuing mandatory notice in terms of proviso to section 92C of Act. (b) In not furnishing, by way of show cause notice, the material or document or information on which he relied for invoking section 92C(3) of the Act and for computing the arm's length price thereunder.
The Ld. CIT(A) grossly erred, in fact and in law, in upholding that M/s. Kaybee Exim Pte Ltd, Singapore ('KEPTL') is an Associated Enterprise ('AE') of the appellant within the meaning of that term under section 92A of the Act.
The Ld. CIT(A) grossly erred, in fact and, in law, in upholding the arm's length brokerage rate for yarn product at 2% as determined by Ld. AO as against 0.75% actually received by the appellant.
(a) The Ld. CIT(A) grossly erred in not appreciating that the comparable instance of 2% brokerage rate adopted by Ld. AO cannot be taken as a comparable instance because it is appellant's own alleged international transaction with its alleged AE and hence it does not represent an arm's length price as defined u/s 92F(ii) of the Act.
(b) 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.
The Ld. CIT(A) grossly erred, in fact and in law, in not allowing the benefit of arm's length range of +1/-5% provided in proviso to section 92C(2) of Act. 3. Brief facts of the case are that the assessee is a company incorporated in
India and engaged in the business of providing assistance in sources and
procurement of yard textile etc. from sources within India and outside India
to KB Exim Pte. Ltd., (KEPTL) Singapore. The assessee filed its return of
income for Assessment Year 2010-11 on 11.02.2011 declaring total income 3
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of Rs. 2,45,672/- as per normal provision of Income-tax Act after setting off
of brought forward losses. The assessee has shown book profit under section
115JB at Rs. 27,99,999/- which was treated as deemed total income and
taxes were paid accordingly. The return of income was selected for scrutiny
and assessment order under section 143(3) was passed on 12.03.2013
assessing the total income at Rs. 3,10,43,784/-. The Assessing Officer while
passing the assessment order made the addition of Rs. 2.44 Crore on account
of Arms Length Price (ALP) in respect of commission received from KB
Exim Pte. Ltd., Singapore for yarn sources services disallowed society
charges in property tax of Rs. 17,61,402/- and adhoc disallowance @ 20% of
total expenses. On appeal before the ld. CIT(A), the addition on account of
ALP was sustained. However, the disallowance of society maintenance
charges was restricted to Rs. 1,06,079/-. The adhoc disallowance of
expenses was deleted. Therefore, further aggrieved by the order of ld.
CIT(A), the assessee has filed the present appeal before us. 4. We have heard the ld. AR of the assessee and ld. DR for the Revenue and
perused the material available on record. Ground No.1 relates to non-
issuance of show-cause notice under section 92C for determination of ALP.
The ld. AR of the assessee submits that no specific notice was issued by the
Assessing Officer to the assessee. Only show-cause notice which may have
some relevance was issued vide notice dated 08.08.2012. Copy of which is
filed at page no. 76 to 77 of Paper Book. The assessee in its reply contended 4
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that section 92C is not applicable to the assessee. Thereafter no such notice
under section 92C was issued to the assessee. The Assessing Officer directly
made the Transfer Pricing Adjustment of Rs. 2.44 Crore without resorting to
the mandatory procedure prescribed under the Act. The ld. CIT(A)
confirmed the action of Assessing Officer on his observation that there is no
change of fact and the observation made by his predecessor for earlier years
order. The ld. AR of the assessee submits that the ld. CIT(A) failed to
appreciate that in earlier years notices under section 92C(3) was issued by
the Assessing Officer before making Transfer Pricing Adjustment. The ld.
AR of the assessee submits that order passed by Assessing Officer suffered
from legal infirmity as the Assessing Officer failed to comply with the mandatory condition under section 92C(3) of the Act which is sine-qua-none
for invoking the provision for determination of ALP. In support of his
submission, the ld. AR of the assessee relied upon the decision of Hon’ble
Delhi High Court in case of Moser Bear India Ltd. vs. ACIT 316 ITR 1
(Del), Maruti Suzuki India Ltd. vs. ACIT [2010] 328 ITR 210 (Delhi.). 5. On the contrary, the ld. DR for the Revenue submits that the submission
made on behalf of the assessee is factually incorrect. Show-cause notice was
issued by Assessing Officer vide notice dated 08.08.2012 and again on
30.12.2013. The assessee chose not to reply the show-cause notice. The
Assessing Officer has no option except to proceed on the basis of material
available on record. The assessee who has not responding to the notice of 5
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Assessing Officer has no right to raise such technical objection. In the
rejoinder submission the ld. AR of the assessee submits that the AO has not
issued any show-cause notice for TP Adjustment as per section 92C(3) for
AY 2010-11 and 2011-12. The notices referred and relied by ld. DR are
notice under section 142(1). The AO has no reason to presume that the
assessee has no objection to follow the assessment order of AY 2008-09 for
making adjustment for AY 2010-11 and 2011-12. 6. We have considered the rival submission of the parties and have gone
through the orders of authorities below. We have noted that first notice
under section 142(1) was issued to the assessee on 20.06.2012. The hearing
was fixed on 05.07.2012. On 05.07.2012 no reply or details were furnished
in respect to the notice issued on 20.06.2012, rather the assessee is requested
for adjournment. Other notice under section 142(1) calling the details was
issued on 08.08.2012 and the hearing was fixed on 17.08.2012. The assessee
furnished certain details vide its reply dated 16.08.2012, filed in Tapal. The
Assessing Officer find no other way issued show-cause notice under section
271(b) for non-compliance of notices issued earlier, no compliance was
made by assessee, therefore, a penalty of Rs. 10,000/- was imposed under
section 271(b), which was duly served upon the assessee on 08.11.2012. The
assessee despite imposition of penalty has not responding to the queries of
the Assessing Officer. We have noted that the ld. DR for the Revenue has
placed on record copy of notices dated 03.12.2010 under section 142(1) for 6
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Assessment Year 2010-11 and dated 30.12.2013 for AY 2011-12. The
Notice for AY 2011-12 is duly acknowledged / received on 30.12.2013. Perusal of the notice shows that AO has mentioned in the said notices “you
are hereby show-caused as to why the Arm’s Length Price should not be
computed in your case”. Similar language is used by AO in notice for
Assessment Year 2011-12. The copies of notices for both the years were
filed before Tribunal and were supplied to the ld. AR of the assessee. The ld.
AR of the assessee either in his oral submission or in his written submission
has not denied the receipt of such notices. 7. The contention of ld. AR of the assessee is that no specific notice under
section 92C(3) was issued to the assessee before making adjustment of
Arm’s Length Price. The careful perusal of section 92C(3) makes it clear
that, if the Assessing Officer on the basis of information on documents in his
possession is of the opinion that price charge or paid in an international
transaction or specified domestic transaction has not been determined in
accordance with sub-section (1) and (2) or any information and document to
in international transaction or specified domestic transaction have not been
kept and maintained by assessee as required under section 92D(1) and Rule
made in this behalf or information or date used in computation of ALP is not
reliable or correct or the assessee failed to furnish within the specified time,
any information or document which he was required to furnished by a notice
issued under sub-section (3) of 92D. The Assessing Officer may proceed to 7
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determine ALP in relation to said international transaction in accordance
with sub-section (1) and (2). However, as per the proviso attached to sub-
section (3) of section 92C , the Assessing Officer by serving a notice shall
provide opportunity to show-cause, on date and time to be specified in the
notice, why ALP should not be determined on the basis of material or
information in possession of Assessing Officer. The Assessing Officer in its
notice, though issued under section 142(1) has clearly made a show-cause as
to why ALP should not be computed in assessee’s case. The assessee failed
to respond the said notice, when the assessee failed to respond to the notices
issued by Assessing Officer, the Assessing Officer levied penalty under
section 271(b). In our view, the Assessing Officer has given sufficient
notice in conformity with the proviso of section 92C(3). It is the assessee
who had not responded and now taken a plea that a mandatory notice as
required under section 92C(3) is not served upon the assessee. 8. The case law relied by ld. DR for the Revenue are not applicable on the facts
of the present case. With utmost regard to the decision of Hon’ble Delhi
High Court in Moser Bear India Ltd. vs. ACIT (supra) and in Maruti Suzuki
India Ltd. vs. ACIT (supra), we find that in the said cases no proper notice
was issued by Transfer Pricing Officer (TPO), both the case law are based
on section 92CA. Section 92CA deals with reference to the Transfer Pricing
Officer. Sub-section (2) of section 92CA require a mandatory notice on the
assessee requiring him to produce on specified date, any evidence which the 8
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assessee may rely in support of computation made by him or ALP in relation to international transaction. 9. Under section 92C, the Assessing Officer is empowered to determine ALP, in accordance with the methods prescribed under sub-section (1) of section 92C. However, section 92CA deals with the reference to the Transfer Pricing Officer and his power and procedure for determination of ALP. Considering the factual matrix of the case in hand, we are of the view that case law relied by ld. AR of the assessee are on different factual matrix and not applicable on the facts of the present case. In the result, ground no. 1 of the appeal raised by assessee has no force and the same is rejected. 10. Ground no.2 relates to treating M/s. Kaybee Exim Pte Ltd., Singapore (KEPTL) is an Associate Enterprises (AE) of assessee. The ld. AR of the assessee submits that the lower authority has deemed KEPTL as AE of assessee merely on account of common Director, Mr. Govind Karunakaran and determined Arms Length Price (ALP) in respect of commission received by assessee from KEPTL for sourcing yarn and made the addition on difference amounting to Rs. 2,44,21,288/-. The Assessing Officer merely relied upon the order of Assessment Year 2008-09. The ld. CIT(A) upheld the action of Assessing Officer on relying on his predecessor order for Assessment Year 2008-09. No specific finding for Assessment Year 2010- 11 was made. The ld. AR of the assessee further submits that for Assessment Year 2008-09 on similar issue whether KEPTL and assessee are AE’s, the 9
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Hon’ble Tribunal held that KEPTL and AE are AE’s vide its order dated
29.05.2015 in ITA No. 3794/Mum/2014. The ld. AR of the assessee further
submits that the Hon'ble ITAT expressed the opinion that for determination
of AE relationship under section 92A of the Act, both section 92A(1) and
section 92A(2) shall be read independently; Hon'ble ITAT held that the AE
relationship can be brought about u/s 92A(1) de'hors section 92A(2). The
Hon'ble ITAT has not rejected the submission of the Appellant that
conditions of section 92A(2) are not fulfilled in the Appellant's case. The
Hon'ble ITAT referred to and relied on the judgment of coordinate bench in
the case of Diageo India (P.) Ltd. Vis Deputy Commissioner of Income-Tax,
Circle 7(3), Mumbai [142 TT J 287, Mumbai]. The Appellant submits that in
the case of Diageo India (P.) Ltd. (Supra) the issue for adjudication before
the Hon'ble ITAT was not whether section 92A(2) and section 92A(1) shall
be read together and only when conditions of both section 92A(1) and
section 92A(2) are satisfied then only AE relationship comes into existence.
In light of aforesaid, it is respectfully submitted that the view taken by
Hon'ble ITAT in the Appellant's case for AY 2008-09 in ITA No.
3749/Mum/2014 needs reconsideration and is no longer good law in view of
subsequent decisions. 11. The ld. AR of the assessee further reiterated that assessee is not AE of KEP
TL within the meaning of section 92A as assessee’s case does not fall within
sub-section (2) of section 92A. In support of his submission, the ld. AR of 10
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the assessee relied upon the decision PCIT vs. Veer Gems 83 taxmann.com
271 (Gujarat), Page Industries Ltd. vs. DCIT [2016] 159 ITR 680
(Bangalore Trib.), Orchid Pharma Ltd. vs. DCIT [2016] 76 taxmann.com 63
(Chennai Trib.), Obulapuram Mining Co. (P.) Ltd. vs. DCIT 76
taxmann.com 240 (Bangalore Trib.). In alternative submission, the ld. AR of
the assessee submits that relationship of AE has to be separately established
for every year. Considering the facts prevailing in that year.
On the other hand, the ld. DR for the Revenue supported the order of
authorities below. The ld. DR further submits that this ground of appeal is
covered against the assessee in assessee’s own case for Assessment Year
2008-09 in ITA No. 3749/Mum/2014 dated 29.05.2015. The assessee has
not brought any material on record to take any contrary view. Therefore, the
assessee has no right to plead otherwise.
We have considered the rival submission of both the parties and have gone
through the orders of authorities below. The perusal of Tribunal’s order for
Assessment Year 2008-09, reveals that the assessee has raised similar
ground of appeal and the Tribunal on the identical facts and on identical
issues passed the following order:
We have considered the rival submissions as well as relevant material placed on record. The language of section 92A(1) is unambiguous and does not leave any scope of importing any meaning of expression "AE". The question raised before us is whether the meaning of expression "AE" as per s.s. (1) of section 92A is subjected to s.s. (2) of section 92A. The ld. Sr. counsel for the assessee has asserted that the criteria prescribed under s.s. (2) are necessarily be fulfilled for two enterprises to be treated as AEs. For ready reference, we quote the section 92A under:- 11
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"92A. Meaning of associated enterprise.- (1) For the purposes of this section and sections 92, 92B, 92C, 92D, 92E and 92F, "associated enterprise", in relation to another enterprise, means an enterprise-- (a) which participates, directly 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 twenty- six 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 9 ITA 3749/Mum/14 enterprise; or (e) more than half of the board of directors or members of the governing board, or one or more executive directors or executive members of the governing board of one enterprise, are appointed by the other enterprise; or (f) more than half of the directors or members of the governing board, or one or more of the executive directors or members of the governing board, of each of the two enterprises are appointed by the same person or persons; or (g) the manufacture or processing of goods or articles or business carried out by one enterprise is wholly dependent on the use of know-how, patents, copyrights, trade- marks, licences, franchises or any other business or commercial rights of similar nature, or any data, documentation, drawing or specification relating to any patent, invention, model, design, secret formula or process, of which the other enterprise is the owner or in respect of which the other enterprise has exclusive rights; or (h) ninety per cent or more of the raw materials and consumables required for the manufacture or processing of goods or articles carried out by one enterprise, are supplied by the other enterprise, or by persons specified by the other enterprise, and the prices and other conditions relating to the supply are influenced by such other enterprise; or (i) the goods or articles manufactured or processed by one enterprise, are sold to the other enterprise or to persons specified by the other enterprise, and the prices and other conditions relating thereto are influenced by such other enterprise; or (j) where one enterprise is controlled by an individual, the other enterprise is also controlled by such individual or his relative or jointly by such individual and relative of such individual; or (k) where one enterprise is controlled by a Hindu undivided family, the other enterprise is controlled by a member of such Hindu undivided family or by a relative of a member of such Hindu undivided family or jointly by such member and his relative; or (l) where one enterprise is a firm, association of persons or body of individuals, the other enterprise holds not less than ten per cent interest in such firm, association of persons or body of individuals; or (m) there exists between the two enterprises, any relationship of mutual interest, as may be prescribed.
The meaning of AEs as provided under s.s. (1) 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 12
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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, 10 ITA 3749/Mum/14 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 that the mere fact of participation by one enterprise in the management or control or capital of the other enterprise, or the participation of one or more persons in the management or control or capital of both the enterprises shall not make them associated enterprises, unless the criteria specified in sub-section (2) are fulfilled."
We have already discussed that s.s. (2) is a deeming fiction and, therefore, the condition/criteria specified therein are required to be fulfilled. As it is clear from the criteria enumerated in clause (a) to (m) of s.s. (2) of section 92A that none of the clauses prescribed any criteria in respect of one enterprise participate directly or indirectly or through one or more intermediaries in the management which is one of the conditions prescribed under clauses (a) & (b) of s.s. (1) of section 92A of the Act. Therefore, even if, for the sake of argument it is presumed that the meaning of AE in terms of s.s. (1) of section 92A has to be understood as per the criteria provided in clause (a) to (m) of s s. (2), the condition of participating in the management directly or indirectly or one or more intermediaries as per clause (a) of s.s. (1) does not get effected by the criteria prescribed under s.s. (2). The Co- ordinate Bench of this Tribunal in the case of Diageo India (P.) Ltd. (supra) had the occasion to consider the meaning of "AE" as per section 92A (1) & (2) in para 10 & 11 as under:-
"10. We find that, in terms of the provisions of section 92A(l )(a), the expression 'associated enterprises' refers to an enterprises "which participates, directly or indirectly, or through one or more intermediaries, in the management or control or capital of the other enterprise". The scope of 'associated enterprises' is expanded further by section 92A(I)(b), taking into account group concerns, and it is provided that 'associated enterprises' covers an enterprise "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." In effect, thus, when same persons participate, directly or indirectly or through an intermediary, in the management or control or capital 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 Income- tax 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 13
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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.
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 enterprise participates in the control or management or capital of the other enterprise (directly or indirectly or through one or more intermediaries) or when persons participating (directly or indirectly or through one or more intermediaries) in control or management or capital of two or more enterprises are the same, the enterprises are said to be associated enterprise. The expression used in the statute is 'participation in control or management or capital', but essentially all these three ingredients refer to de facto control on decision making. In terms of the basic rule thus, whether one enterprise controls the decision making of the other or whether decisions making of two or more enterprise are controlled by same interests, these enterprises are required to be treated as 'associated enterprise'. Section 92A(2)gives practical illustrations of this kind of a control. All these illustrations deal with simple situations of dealing with two enterprise, as envisaged in section 92A(1)(a), but these are equally good for application in situations involving more than two enterprise, as envisaged in section 92A(1)(b). Section 92A(2)(e), for example, refers to a situation in which "more than half of the directors or members of the governing board, or one or more of the executive directors or members of the governing board, of each of the two enterprises are appointed by the same person or persons" but this deeming fiction is equally applicable when the same person appoints, say, more than half of the directors of the governing board for three or more enterprises. A literal interpretation to this clause will mean that if this relationship is between two enterprises, these two enterprises are required to be treated as 'associated enterprises' but when the same basis extends to more than two enterprises, these enterprises will not be associated enterprises. That is clearly an incongruous result. In our considered 'view, as all clauses of deeming fictions set out in section 92:(2) are only illustration of the manner in which this de facto control on decision making exists, It is necessary that, while interpreting these deeming fictions, we interpret the same in such a manner as to make them workable rather than redundant (ut res magis valeat quam pereat), and that the same test of effective control on decision making as are implicit In deeming 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 trade- marks 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 this view of the matter, as also bearing in mind entirety of the case, the relationship of AEs exist between the assessee, the CBU and Diego group entities from which raw materials were purchased by the CBU. In any case, since the costs of all the raw materials is picked up by the assessee for all effective purposes. the transaction is actually between the assessee and the Diageo group concerns supplying the raw material to the CBU, and since the assessee as also these vendors are admittedly under 14
ITA No. 2166 & 2167 Mum 2015 – M/s Kaybee Private Limited
the control of Diageo PLC, the transactions are clearly between the associated enterprises The objection raised by the assessee to the effect that the transactions of imports of raw material by the CBU, i. e. Konkan Agro, from Diageo group entities cannot be treated as international transactions between the associated enterprises, therefore, is rejected.
The Tribunal was of the view that all the clauses of deeming fictions set out in section 92A (2) are only illustration of the manner in which this de facto control on decision making exists. We will now examine the facts of the case in hand in the context of the requirement of one enterprise participate directly or indirectly or through one or more intermediaries inter alia in the management of the other enterprise as per clause (a) & (b) of s.s. (1) of section 92A. The assessee has given the position of the Directors and shareholders of the assessee and Kaybee Exim Pte Limited, Singapore during the financial year 2007-08 relevant to the assessment year under consideration at page 97 of the paper book as under:-
Directors Kaybee India Pvt. Ltd. Kaybee India Pvt. Ltd. [Yest/No] [Yest/No] 1. Mr. Deepak Gurnami Yes Director No 2. Mr. Govind Karunakaran Yes Director Yes Director 3. Mr. Suresh Chand Gupta Yes Director No 4. Mr. Vikram Chand No Yes Director 5. Mr. Kumar Kishinchand No Yes Director Gajwani
Shareholders Kaybee India Pvt. Ltd. Kaybee Exim Pte Ltd. [%of holding ] No. of : % of
Shares : holding 1. Mr. Govind Karunakaran 999 shares: 99.9% 0% 2. Mr. Deepak Gurnami 1 share : 0.1% 0%
From the above details, it is seen that Mr. Govind Karunakaran is a Director in the assessee company and also a Director in Kaybee Exim Pte Limited, Singapore. He is also 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 Name (as per ROC Date of Designation in Designation in No. filing) appointment (as Kaybeen Pvt. Ltd. Grupokaybee as per filing) (as per ROC www.kaybeegroup filing) 1 Shri Vikram Kumar 07.05.1993 Chairman cum Managing Chand Managing Director Director 2 Shri Deepak 07.05.1993 Director Director Atmaram Gurnami 3 Shri Govind 19.02.1996 Director Chief Operating Karunakaran Officer 4 kShri Nagendra 19.02.1996 Director Finance Director Kumar Rallaoalli 15
ITA No. 2166 & 2167 Mum 2015 – M/s Kaybee Private Limited
5 Shri Suresh Cahnd 18.08.1997 Director -- Gupa
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 the management of Kaybee Exim Pte Limited, Singapore and is part of decision making process of the said company since 1996. Shri Govind Karunakaran is a common director in both the company and participating in the management of both the companies not for the name sake but he is holding the key position in taking decision being a Chief Operating Officer of Kaybee Exim Pte Limited, Singapore and almost the entire shareholding of the assessee company, therefore, the condition of one enterprise participates directly or indirectly or through one or more intermediaries in its management or control or capital as prescribed under clause (a) & (b) of s.s. (1) of section 92A is satisfied. Hence, the assessee and Kaybee Exim Pte Limited, Singapore falls under the meaning of AEs as per the provisions of section 92A.” 14. Considering the decision of Co-ordinate Bench in assessee’s own case on
almost identical ground and on identical fact and respectfully following the
same, the ground no.2 of the appeal is dismissed. For alternative contention
of the ld. AR of the assessee that each year relationship for the determination
of AE’s has to be separately established. We have noted that the assessee has
not brought any material fact on record to take any contrary view for the
year under consideration. Therefore, the alternative submission of the
assessee is that each year relationship for the determination of AE’s has to
be separately established, as also rejected.
Ground No.3 to 5 relates to upholding the ALP. The ld. AR of the assessee
submits that assessee charged 2% brokerage on textile sourcing and .75%
brokerage on yarn sources to KEPTL, the Assessing Officer made the ALP
on the basis of Assessment Year 2008-09 and computed the ALP
ITA No. 2166 & 2167 Mum 2015 – M/s Kaybee Private Limited
commission value of Rs. 3,90,73,965/- and made consequent addition of Rs.
2.44 Crore. The ld. CIT(A) has not given any specific finding and merely
relied upon the order of his predecessor for Assessment Year 2008-09. The
ld. AR of the assessee submits that the Assessing Officer has not followed
the methodology for determination of ALP as specified in section 92C(1)
read with Rule 10B of I.T. Rules 1962. The ld. AR of the assessee firstly
submit that Assessing Officer’s assumption that entire shipment from yarn is
factually erroneous and therefore, assumption of factual erroneous and
addition made on factual erroneous assumption cannot be sustained, and
secondly bench marking of transaction to adopt the rate of 2% to compute
the service income on yarn has not complied with the provision of section
92C. 16. On the other hand, the ld. DR for the Revenue submits that the assessee has
not furnished the details during the course of assessment proceeding. Under
those circumstances, the Assessing Officer was constraint to take related
party transaction as a base to bench marking international transaction.
However, as per provision of bench mark international transaction, the
unrelated party transaction has to be taken as a base. The ld. DR for the
revenue submits that the case may be restored to the file of Assessing
Officer to bench mark the international transaction base on unrelated
transaction. In support of his submission, the ld. DR for the revenue relied
ITA No. 2166 & 2167 Mum 2015 – M/s Kaybee Private Limited
upon the decision of Chennai Tribunal in case of M/s. SCM Microsystems (India) Pvt. Ltd. (ITA No. 774/Mds/2011. 17. We have considered the rival submission of the parties and have gone
through the orders of authorities below. We have noted that the Assessing Officer has not computed the ALP by adopting the method prescribed under section 92C(1). The Assessing Officer relied upon the order of Assessment
Year 2008-09. The Assessing Officer has not made any attempt to select unrelated party transaction for making a base to bench marking international transaction. The Assessing Officer relied solely on the order of Assessment Year 2008-09 on his observation that no details was furnished by assessee despite repeated notices. Considering the factual matrix of the case as the Assessing Officer has not adopted the method prescribed under section
92C(1), therefore, we deem it appropriate to restore this ground of appeal to the file of Assessing Officer to re-compute the ALP afresh. Needless to say that Assessing Officer shall provide opportunity to the assessee before passing the order in accordance with law. The assessee is also directed to
furnish all documentary evidence to substantiate their contention. 18. In the result, ground no. 3 to 5 are allowed for statistical purpose. 19. Ground No.6 relates to disallowance of society charge and property tax. The ld. AR of the assessee submits that the assessee has taken a premises on rent. The premise was used by assessee for the purpose of its business. The assessee has paid Rs. 1,06,079/- as property tax and society charges for the 18
ITA No. 2166 & 2167 Mum 2015 – M/s Kaybee Private Limited
tenanted premises. The said property tax and charges was paid as per the
understanding between the lesser and the lessee/assessee. The Assessing
Officer made the addition/disallowance on the basis of Assessment Year
2008-09. The ld. CIT(A) confirmed the action of Assessing Officer holding
that similar addition was made in Assessment Year 2004-05 & 2007-08. The
ld. AR of the assessee further submits that the assessee is entitled for
deduction under section 3791) as the expenses were incurred for the purpose
of business. The assessee has not filed any appeal for Assessment Year
2004-05 and 2007-08. Considering the smallness of the amount. The
expenditure made by assessee is not capital in nature, made wholly and
exclusively for the purpose of business. 20. On the other hand, the ld. DR for the revenue supported the order of lower
authorities. 21. We have considered the rival submission of the parties and have gone
through the orders of authorities below. We have noted that lower authority
has disallowed the expenses on the basis of order of earlier years. Before us,
the ld. AR of the assessee vehemently submitted that the expenses were
incurred as per the agreement/understanding between the lesser and the
lessee/assessee. Considering the factual matrix of the case, principally, we
are of the view that the expenditure made on account of society and property
tax are allowable expenses, if the payment is made under contractual
obligation with the lesser/owner and the lessee/assessee. Therefore, the 19
ITA No. 2166 & 2167 Mum 2015 – M/s Kaybee Private Limited
Assessing Officer is directed to verify the fact, if the assessee has incurred these expenses with the consent /agreement of lesser and allowed the appropriate relief to the assessee in accordance with law. 22. In the result, ground no.6 is allowed for statistical purpose. 23. In the result, appeal of the assessee is partly allowed.
ITA No. 2167/Mum2015 for AY 2011-12 24. The assessee has raised four ground of appeal. 25. Ground No.1 relaters to non-issuance of notice under section 92C(3) of the Act. We have noted that the ground no.1 of the appeal is identical to the ground no.1 of appeal for AY 2010-11, which we have dismissed. Therefore, following the principle of consistency, this ground of appeal is dismissed with similar observation. 26. Ground No. 2 relates to treating KEPTL as AE of assessee. We have noted that the ground no.1 of the appeal is identical to the ground no.2 of appeal for AY 2010-11, which we have dismissed. Therefore, following the principle of consistency, this ground of appeal is dismissed with similar
observation. 27. Ground No. 3 & 4 relates to upholding the ALP. We have noted that these grounds of the appeal are identical to the ground no.3 & 4 of appeal for AY 2010-11, which we have restored to the file of Assessing Officer for passing the order afresh. Therefore, following the principle of consistency, these
ITA No. 2166 & 2167 Mum 2015 – M/s Kaybee Private Limited
grounds of appeal is also restored to the file of Assessing Officer with
similar observation.
In the result, both the appeal of the assessee are partly allowed.
Order pronounced in the open court on 08.08.2018.
Sd/- Sd/- R.C. SHARMA PAWAN SINGH ACCOUNTANT MEMBER JUDICIAL MEMBER Mumbai, Date: 08.08.2018 SK Copy of the Order forwarded to : 1. Assessee 2. Respondent 3. The concerned CIT(A) 4. The concerned CIT 5. DR “K” Bench, ITAT, Mumbai 6. Guard File BY ORDER, Dy./Asst. Registrar ITAT, Mumbai