THE ITO-19(1)(3), MUMBAI vs. EXQUISITE JEWELLERY, MUMBAI

Brief facts of the case are that the assessee a partnership firm engaged in the business of manufacturing and exporting of diamond studded jewellery, filed its return of income for the assessment year under consideration declaring the total income of Rs. 29,686/- after claiming exemption u/s 10A of the Act. During the course of assessment, the AO referred the issue relating to the international transaction with its associate enterprises to Transfer Pricing Officer (TPO) u/s 92CA (1) of the Act for determining the arms length price. Accordingly, the TPO passed order u/s 92CA of the Act making adjustment on account of interest chargeable on excess period of credit allowed by the assessee to the AEs and a sum of Rs. 2,88,55,648/- was determined as arms length compensation being interest @ 18% on delay of credit period and an addition of this amount was made by the AO. The assessee preferred appeal against the said order before the CIT (Appeals), the Ld. CIT (Appeals) partly allowed the appeal of the assessee and reduced the interest from 18% to LIBOR rate + 2 points. The assessee further challenged the impugned order by filing appeal before the ITAT. The ITAT after hearing the assessee restore the issue to the file of Ld. CIT(A) for deciding the legal ground taken by the Assessee to the effect that M/s Combined International Inc., USA and Envision LLC, USA are not covered within the definition of “AE” in terms of section 92A(2)(i) of the Income Tax Act, 1961.

The revenue has challenged the impugned order on the following effective grounds:-. 1. “Whether Ld. CIT (A) is justified in deciding that M/s Combine International Inc USA & M/s Envision LLC USA are not the Associated Enterprise of assessee on the basis of assessee’s submission, when the assessee himself had stated these entities as Associated Enterprise in form 3CEB?

At the outset, the Ld. departmental representative submitted that the Ld. CIT(A) has passed the impugned order without giving any findings whether M/s Combined International Inc., USA and Envision LLC, USA are AEs within the meaning of section 92A(2)(i) of the Act. Moreover, the Ld. CIT(A) has decided the issue without taking into consideration the TPO’s comments on the submissions made by the assessee.

On the other hand the Ld. counsel for the assessee relying on the order passed by the Ld. CIT(A) submitted that the Ld. CIT(A) has passed the order under challenged after taking into consideration the entire facts and circumstances of the case. The Ld. counsel further submitted that since the Ld. CIT(A) has decided the issue in the light of the directions given by the ITAT, there is no merit in the department’s appeal, hence liable to be dismissed.

We have heard the rival submissions and perused the material on record in the light of the rival contentions of the parties. The coordinate Bench of the tribunal has remanded the appeal back to the file of Ld. CIT (A) for deciding the issue afresh vide order dated 05.12.2014 passed in the assessee’s appeal for the A.Y. under consideration. The relevant para of the order of the co-ordinate Bench reads as under:-

From the directions of the co-ordinate Bench, it is amply clear that the co-ordinate Bench has directed the Ld. CIT (A) to ascertain whether M/s Combined International Inc., USA and Envision LLC, USA AEs in terms of section 92A(2)(i) of the Act. Whereas the Ld. CIT (A) has held in its finding that there does not exist any relationship between the assessee and the said enterprises as envisaged u/s 92A (1) and 92A(2) of the Act, i.e. these are not associated enterprises as there exists no relationship of mutual interest between the assessee and the two concern referred above. Section 92A (2) (i) says that for the purpose of sub-section (1), the two enterprises shall be deemed to be associated enterprises if, at any time during the previous year, 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. It may be noted that existence of mutual interest relationship or management control or ownership control is not required for invoking provisions of section 92A (2) (i) of the Act.

As per the assessment order, value of international transactions undertaken by the assessee with its associate enterprises exceeded Rs. 15 crores. Accordingly, the issue was referred to the TPO u/s 92CA (1) of the Act for determining the arms length price of the international transaction. Since, the Ld. CIT (A) had not examined the issue in the light of sub-section 2 (i) of section 92A, the specific direction was issued by the ITAT to examine the matter afresh in the light of the said section. However, we notice that the Ld. CIT (A) has again decided the issue taking into consideration the conditions contemplated under sub-section 2 clause (a) to (h) and not taking into consideration the clause (i) of the said sub-section. The Ld. CIT (A) has nowhere mentioned that while dealing with the AEs, the price and other conditions relating thereto were not influenced by such other enterprise.

In view of the fact that the Ld. CIT (A) has not complied with the directions of the co-ordinate Bench aforesaid, we are of the considered view that the issue in question is required to be adjudicated by the Ld. CIT (A) in accordance with the direction given by the ITAT. We therefore set aside this issue to the file of Ld. CIT (A) to decide the same afresh in the light of the directions given by the co-ordinate Bench vide order dated 05.12.2014 discussed above. (Assessment Year: 2008-09)