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Income Tax Appellate Tribunal, “E” BENCH, MUMBAI
Before: SHRI D.T. GARASIA, JM & SHRI MANOJ KUMAR AGGARWAL, AM
Per Manoj Kumar Aggarwal (Accountant Member)
ITA Nos.3037, 3038, 3040 & 3077/Mum/2014 Sopariwala Exports Assessment Years-2004-05 to 2006-07 1. The captioned appeal by assessee as well as revenue for Assessment Years 2004-05 to 2006-07 contest common order of Ld. Commissioner of Income Tax (Appeals)-37 [CIT(A)], Mumbai, Appeal Nos. CIT(A)-37/IT 509 to 513/ACCC-44/12-13 dated 24/02/2014. Since common issues are involved, we dispose-off the same by way of this common order for the sake of convenience and brevity. First we take up which is revenue’s appeal for Assessment Year [AY] 2004-05 by raising following grounds of appeal:- 1. “On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in allowing the commission paid to overseas agent M/s Khadlaj Perfumes LLC, for the A.Y.2004-05 without appreciating the fact that the assessee was unable to prove the need for commission @25% paid to M/s.Khadlaj Perfumes LLC, whereas commission incurred with other parties was @0.5% to 5.85%” 2. “On the facts and in the circumstances of the case and in law, the Ld. CIT(A), erred in deleting the addition made in respect of loan advanced to associated enterprises, M/s.Mellow Commodities SDN.BHD at arm’s length price, without appreciating the fact that section 92 of the I.T. Act is clearly applicable to the transaction made with the associated entity.” 3. “On the facts and in the circumstances of the case and in law, the Ld. CIT(A), erred in allowing the appeal of the assessee placing reliance on the decision of the jurisdiction Hon’ble ITAT, Mumbai Bench(Special Bench) in the case of M/s. All Cargo Global Logistics Ltd (137 ITD 287), whereas the decision in All Cargo global logistics Ltd has been further contested in appeal and the decision of the Hon’ble Mumbai High Court is still pending.”
4. The Appellant prays that the order of the CIT(A), on the above grounds be set aside and that of the Assessing Officer be restored.
Facts, in brief are that the assessee being resident firm engaged in the business of exports of tobacco products and other items was subjected to an assessment u/s 143(3) read with Section 153A for the impugned AY on 31/12/2010. Consequent to search action u/s 132 on Sopariwala Group of cases on 29/04/2008, the assessee being part of the group, was also covered under the same. Accordingly, notices u/s 3038, 3040 & 3077/Mum/2014 Sopariwala Exports Assessment Years-2004-05 to 2006-07 153A were issued for AY 2003-04 to 2009-10 on 29/01/2010, pursuant to which the assessee filed returned income of Rs.752.43 Lacs on 04/03/2010. The original income was determined u/s 143(3) on 26/12/2006 at Rs.906.08 Lacs. The assessment u/s 143(3) read with Section 153A was completed by Ld. Assistant Commissioner of Income Tax, Central Circle-44, Mumbai [AO] after making certain quantum additions of Rs.384.10 Lacs. The quantum additions pertained to commission disallowance of Rs.370.43 Lacs paid to an entity namely Khadlaj Perfumes LLC and disallowance of interest for Rs.13.66 Lacs being proportionate interest @10% on certain interest free loans advanced by the assessee to its associated enterprises namely Mellow Commodities SDN BHD.
Aggrieved, the assessee contested the same with success before Ld.CIT(A) vide impugned order dated 24/02/2014 where the assessee while contesting the impugned additions drew attention to the fact that the assessment for the impugned AY was not pending on the date of search and had not abated in terms of Section 153A and therefore, the additions, which were to be made by Ld. AO could be qua incriminating material found during the search operations only and since no incriminating material was found in the search, the impugned additions were not justified. The Ld. CIT(A), after appreciating factual matrix and assessee’s various contentions, concurred with the stand of the assessee by making the following observations:- 5.9.32 From the discussion above, it is noted that the Annex. A-5 referred to in the assessment order is a loose paper file comprising mainly of unaudited balance sheet and stock report as on 31/03/2008 in respect of various group companies. There is no incriminating document brought on record by the AO in respect of disallowance of commission expenses. The Commission was being paid even prior , 3038, 3040 & 3077/Mum/2014 Sopariwala Exports Assessment Years-2004-05 to 2006-07 to AY 2004-05 and even in respect of Afzal Pandharpuri. Commission payment even at rate of 32% had been incurred in earlier years. Scrutiny assessments were made for AY 2004-05 and AY 2005-06, prior to search, and no disallowance of commission expenses were made. There is a generally accepted practice and requirement of appointing a local agent for business in Middle East. From the details of country wise exports called, it is observed that sales to UAE and Yemen fell at end of 2002-03 and beginning of FY 2003-04. The exports of Afzal Pandharpuri to UAE fell from Rs.7.45 crores in FY 2002-03 to Rs.6.36 crores in FY 2003-04. Similarly exports to Yemen fell from Rs.2.53 crores in FY 02-03 to Rs.1.61 crores in FY 2003-04. This corroborates the claim of the appellant that its sales were getting affected by availability of spurious and duplicate products necessitating appointment of a strong sales agent. The sales of branded product Afzal Pandharpuri went up manifold, both in terms of value and quantity, even after increasing the sales price, after the appointment of Khadlaj Perfumes LLC, Dubai. The details of the commission agent giving name and address was furnished. The AO did not seek verification of details regarding the foreign agent by using the DTAA provisions for exchange of information and unreasonably insisted on the appellant to furnish financial statements, tax returns of its foreign agent and insisted on the production of the foreign agent before the AO. The AO selectively looked at the financial data ignoring the increased profitability in later years which were available at the time assessment was completed, thereby concluding that the commission agent was appointed to siphon out money. The AO ignored evidence on record at the time of post search investigation showing commission payments as high as 32.4%, thereby erroneously concluding that rate of commission to Khadlaj Perfumes LLC was very high. The overall export over the period AY 2004-05 to AY 2009-10 shows that the sales targets were achieved. The assessing Officer ignored the evidence in support of services provided by the agent such as email, elimination of spurious products and action against infringement of copyrights, confirmation of the commission agent, evidence of sales executed with the help of the agent. These evidences support the case of genuineness of commission payment. The commission payments and the rates are disclosed in the application filed with RBI which has allowed the same. In case of commission exceeding 12%, the details have to be mentioned and remittance of commission requires RBI approval. It is reasonable to expect that the appellant cannot force the foreign commission agent to furnish its audited financial statements and tax returns and to force the principal officer of the foreign agent to appear before the assessing officer. That the issue of commission expenses was taken up through the assessing officer’s letter dated 08-12-2010 and appellant’s reply dated 22-12-2010, supports the grievance of the appellant that reasonable opportunity was not given to it in the assessment proceedings. The assessment order and the remand report indicates that the assessing officer’s emphasis is on appellant maintaining meticulous documentary evidences for commission expenses. The appellant is not incorrect in claiming that business is not run with an eye on creating documentary evidence for everything. The disallowance cannot be made for AY 2004-05 and AY 2005-06, sans incriminating documents, as per the ratio of the decision of the Special Bench in case of AI Cargo (supra). In view of the above facts and discussions, the action of the AO in disallowing the entire commission expenses is not tenable on merits. As regards the alternative contention of the assessing officer, I have already discussed earlier that the assessing officer has selectively considered the rates of commission without spelling out any reason. This action of the assessing officer is biased. Further, I am unable to agree with the view of the AO that even if the commission services is held as genuine, part of the payment should still be disallowed as unreasonable. Once the services is held to be genuine, it is not for the AO to sit in judgment on the reasonableness of the payment. In any case there is no evidence that the payment has been siphoned off. The commission agent is an independent third party. I therefore do not uphold the , 3038, 3040 & 3077/Mum/2014 Sopariwala Exports Assessment Years-2004-05 to 2006-07 alternative argument of the AO. Ground of appeal
no.8 is allowed for all the AY. 2004-05 to AY.2008-09 Similarly, the disallowance of proportionate interest on interest free advances given by the assessee was deleted by Ld. CIT(A) by noting that the advances were subsequently converted into Share Capital and the said transactions were duly approved by the RBI. Finally, the matter was concluded in the following manner:- 5.10.6 It is noticed that in the assessment order there is no reference to any incriminating seized material found during the course of search on this issue. As discussed earlier in respect of disallowance of commission, the Hon’ble ITAT Spl. Bench in the case of AI Cargo Global Logistic Ltd. Vs. DCIT has held that in respect of completed assessments, no addition can be made which is not based on any incriminating material found in the course of search. To that extent such addition in the present case cannot be made up to A.Y.2006-07. 5.10.7 Coming to the merits of the case it is seen that the AO has not examined the nature of transaction carefully. First, there is ample evidence that the amount advanced by appellant to its subsidiary was for investing in its equity. The AO has not noticed that the first trash of the loan was already converted into equity amounting to Rs.66,99,900/- equivalent to USD 1,50,000/- in the first year itself (calendar year 2004). Even the subsequent remittances to the extent of Rs.21,66,09,171/- equivalent to USD 49,00,000 remitted between 14/01/04 to 31/01/05 was subsequently converted entirely into shares on 14/12/07. Thus on the date when assessment order was passed on 31-12-2010, there was no doubt that the entire amount had been converted into equity. In the case of Micro Inks Ltd., the Hon’ble ITAT Ahmedabad Bench in its order dated 06/08/13 has examined this issue. The Hon’ble Bench has considered the earlier Tribunal decision referred to by the AO. The facts of the Micro Inks Ltd are similar to the facts of the appellant. In that case also the amount advanced was eventually converted in to equity capital and advances were made from the EEFC account. The Hon’ble Tribunal noted that the loan was in the nature of quasi capital and that it was not open to the assessee to subscribe to the equity capital without the permission of the RBI. To that extent the ITAT distinguished the facts from the facts of case Perot Systems Ltd which has been relied upon by the AO. For the detailed reasons mentioned therein, the Tribunal came to the conclusion that no ALP adjustment was warranted in that case. 5.10.8 Coming to the case of the appellant, it is seen that the facts are similar to the case decided by ITAT Ahmedabad Bench. From the copies of audited accounts of the subsidiary filed in appellate proceedings, it is seen that the authorized capital of the subsidiary was 100000 MYR at beginning of calendar year 2003 which increased to 500000 MYR by the end of 2003. This again was increased to 1000000 MYR by end of calendar year 2004. In calendar year 2006, MYR 430300 was shown as share application money. In calendar year 2007, the total share capital went up to MYR 190,42,700 and the share application money was converted into equity. Further, the AO has made halfhearted attempt at determining the comparable. He , 3038, 3040 & 3077/Mum/2014 Sopariwala Exports Assessment Years-2004-05 to 2006-07 has taken the LIBOR rate to be uniform 6% for the entire period of FY 2003-04 to FY 2007-08 on the dates when the amount was advanced without identifying the LIBOR rate for the specific dates on which the amount was advanced and for specific tenure. Further, there is no basis given for determining the markup @ of 4% over LIBOR. Lastly and most significantly, the AO has not examined the true nature of transaction that the amount was advanced only as subscription to equity capital. The fact that the entire amount advanced was converted into equity was before the AO even as he framed the assessment order. It is a fundamental proposition of Transfer Pricing that the true character of the transaction has to be considered before applying the ALP. The contractual terms, the economic circumstances, the nature of transaction, the business purpose and strategy-all have to be considered before a comparable is sought. In the present case, such an analysis would indicate that the amount was advanced as towards equity and not as commercial loan. There was some delay in converting the advances in to equity, but the same is explained as delay in getting the necessary approvals. If at all LIBOR is considered, appropriate adjustments have to be made to account for the difference in the transaction being evaluated, which in the present case is quasi equity. In my view, in the facts and circumstances of this case and the case law in the case of Micro Inks Ltd., the impugned transaction is not in the nature of loan, therefore, the same cannot be compared with LIBOR rate along with the markup. I am unable to uphold on merits the adjustment made as ALP. The adjustment made for AY 2004-05 and AY 2005- 06 is liable to be deleted further also in view of the Special Bench decision in the case of AI Cargo (supra). The adjustment computed by the AO is therefore directed to be deleted. Accordingly, the ground of appeal no.9 is allowed for all the AY.2004-05 to AY.2008-09 Aggrieved, the revenue is in further appeal before us.
4. The Ld. Departmental Representative [DR] contended that payment of commission at such a higher rate of 25% was not justified and placed reliance on the stand of Ld. AO. Per Contra, Ld. Counsel for Assessee [AR] contended that the stand of Ld. CIT(A) was quite fair and logical one in view of the decision of Hon’ble Bombay High Court rendered in CIT Vs. Continental Warehousing Corporation [2015 374 ITR 645] and ITAT Special Bench decision in AlCargo Global Logistics Limited Vs DCIT [2012 137 ITD 287].
5. We have heard the rival contentions and perused relevant material on record including the cited case laws. So far as the facts are , 3038, 3040 & 3077/Mum/2014 Sopariwala Exports Assessment Years-2004-05 to 2006-07 concerned, it is un-controverted position as noted by Ld. CIT(A) that no incriminating material was found in the search operations qua the additions and the additions were not based on any incriminating material. The original assessment u/s 143(3) had already completed on 26/12/2006 whereas the search took place on 29/04/2008 which clearly reflect that no assessment was pending on the date of search operations and no proceedings have abated on the date of search. Therefore, we find that, at the moment, the issue stood squarely covered in assessee’s favor by the cited decision of jurisdictional Bombay High Court as rightly noted by Ld. CIT(A). Similar view has been taken by Hon’ble Delhi High Court in CIT Vs. Kabul Chawla [380 ITR 573]. Further, upon perusal of SLP No. 18560 of 2015 dated 12/10/2015 admitted by Hon’ble Supreme Court against the decision of Hon’ble Bombay High Court rendered in CIT Vs. Continental Warehousing Corporation [supra], we find that Hon’ble apex court has only admitted SLP against the ruling of the Hon'ble Bombay High Court's finding that no addition can be made in respect of assessments which have become final if no incriminating material is found during search or during 153A proceedings. It is seen that the Hon'ble Apex Court has not stayed or suspended the operation of the decision of the Hon'ble Bombay High Court and therefore, at the moment, the decision of jurisdictional High Court is binding on us and we are bound to follow it.
6. For the sake of completeness, we find that Hon'ble Delhi High Court in the case of Kabul Chawla (supra) and others dated 28/08/2015 has summarized the legal position on the issue as under :- , 3038, 3040 & 3077/Mum/2014 Sopariwala Exports Assessment Years-2004-05 to 2006-07 "Summary of the legal position:
37. On a conspectus of Section 153A(1) of the Act, read with the provisos thereto, and in the light of the law explained in the aforementioned decisions, the legal position that emerges is as under : i. Once a search takes place under Section 132 of the Act, notice under Section 153A(1) will have to be mandatorily issued to the person searched requiring him to file returns for six A.Ys immediately preceding the previous year relevant to the A Y in which the search takes place. ii. Assessments and reassessments pending on the date of the search shall abate. The total income for such AYs will have to be computed by the AOs as a fresh exercise. iii. The A.O. will exercise normal assessment powers in respect of the six years previous to the relevant A.Y. in which the search takes place. The AO has the power to assess and reassess the 'total income' of the aforementioned six years in separate assessment orders for each of the six years. In other words there will be only one assessment order in respect of each of the six AYs. ''in which both the disclosed and the undisclosed income would be brought to tax". iv. Although Section 153A does not say that additions should be strictly made on the basis of evidence found in the course of the search, or other post-search material or information available with the AO which can be related to the evidence found, it does not mean that the assessment can be arbitrary or made without any relevance or nexus with the seized material. Obviously an assessment has to be made under this Section only on the basis of seized material. v. In absence of any incriminating material, the completed assessment can be reiterated and the abated assessment or reassessment can be made. The word 'assess' in Section 153A is relatable to abated proceedings (i.e. those pending on the date of search) and the word 'reassess' to completed assessment proceedings. vi. Insofar as pending assessments are concerned, the jurisdiction to make the original assessment and the assessment under Section 153A merges into one. Only one assessment shall be made separately for each A Y on the basis of the findings of the search and any other material existing or brought on the record of the A.O. vii. Completed assessments can be interfered with by the AO while making the assessment under Section 153A only on the basis of some incriminating material unearthed during the course of search or requisition of documents or undisclosed income or property discovered in the Course of search which were not produced or not already disclosed or made known in the course of original assessment. Conclusion
38. The present appeals concern AYs, 2002-03, 2005-06 and 2006-07. On the date of the search the said assessments already stood completed. Since no incriminating ITA Nos.3037, 3038, 3040 & 3077/Mum/2014 Sopariwala Exports Assessment Years-2004-05 to 2006-07 material was unearthed during the search, no additions could have been made to the income already assessed.
The question framed by the Court is answered in favour of the Assessee and against the Revenue." Respectfully following the binding judicial precedent, we upheld the conclusions drawn by Ld. CIT(A) and dismiss revenue’s appeal. Revenue’s Appeal AY 2005-06 7. The assessee, in the similar fashion suffered quantum additions against commission and interest aggregating to Rs.637.60 Lacs. The Ld. CIT(A) applying the same logic and reasoning, deleted the same. The order of first appellate authority is common order from AY 2004-05 to 2008-09. Aggrieved, the revenue is in further appeal before us and raised identical worded grounds of appeal
. Since, we have already dismissed revenue’s appeal for AY 2004-05 on identical facts and circumstances, taking the same view, this appeal also stand dismissed. Revenue’s Appeal ITA No. 3038/Mum/2014, AY 2006-07
8. In this year, the assessee has, inter-alia, suffered quantum additions against commission and interest for Rs.622.41 Lacs & Rs.223.37 Lacs which has been deleted by Ld. CIT(A) on the same logic and reasoning. Aggrieved, the revenue is in further appeal before us with identical worded grounds of appeal. We find that in this year all facts are similar except for the fact that the original return of income filed by the assessee was processed u/s 143(1) on 16/07/2007 and there was no original scrutiny assessment u/s 143(3). Be that as the case may be, we find that the time limit for issuance of notice u/s 143(2) against original return of income had already expired well before the date of search i.e. 29/04/2008. We find that this Tribunal in the case of Gurinder Singh , 3038, 3040 & 3077/Mum/2014 Sopariwala Exports Assessment Years-2004-05 to 2006-07 Bawa Vs. DCIT [2012 28 Taxmann.com 328] has applied the ratio of the judgment of Special Bench rendered in AlCargo Global Logistics Limited Vs DCIT [2012 137 ITD 287] and held as under:- 6.1 The Special bench in the case of Alcargo Global Logistics Ltd. (supra), has held that provisions of section 153A come into operation if a search or requisition is initiated after 31.5.2003 and on satisfaction of this condition, the AO is under obligation to issue notice to the person requiring him to furnish the return of income for six years immediately preceding the year of search. The Special Bench further held that in case assessment has abated, the AO retains the original jurisdiction as well as jurisdiction under section 153A for which assessment shall be made for each assessment year separately. Thus in case where assessment has abated the AO can make additions in the assessment, even if no incriminating material has been found. But in other cases the Special Bench held that the assessment under section 153A can be made on the basis of incriminating material which in the context of relevant provisions means books of account and other documents found in the course of search but not produced in the course of original assessment and undisclosed income or property disclosed during the course of search. In the present case, the assessment had been completed under summary scheme under section 143(1) and time limit for issue of notice under section 143(2) had expired on the date of search. Therefore, there was no assessment pending in this case and in such a case there was no question of abatement. Therefore, addition could be made only on the basis of incriminating material found during search.
Further, the revenue’s appeal against the said order of the Tribunal has been dismissed by Hon’ble Bombay High Court in CIT Vs. Gurinder Singh Bawa [2015 79 Taxmann.com 398] finding no substantial question of law in the same. Hence, facts being identical, following binding judicial precedent, we dismiss revenue’s appeal. Assessee’s Appeal
In this year, the assessee has suffered another quantum addition of Rs.72.18 Lacs, being expenses incurred for charitable purposes which has been confirmed by Ld. CIT(A). The Ld. AR, at the outset, drew our attention to the additional Grounds of Appeal
being filed by the assessee vide letter dated 24/10/2017 which reads as under:- , 3038, 3040 & 3077/Mum/2014 Sopariwala Exports Assessment Years-2004-05 to 2006
07. The Learned CIT(A) failed to appreciate that as assessment was completed and as no incriminating material was unearthed during search, no addition can be made in the assessment order u/s 153A r.w.s 143(3).
Since the same is purely legal ground and do not require appreciation of new facts and therefore, admitted in terms of ruling of Hon’ble Apex Court in NTPC Ltd. Vs. CIT [229 ITR 383] and Jute Corporate of India Ltd. Vs. CIT [187 ITR 688].
The Ld. AR further drew our attention to the fact that no incriminating material was found during search operation qua this addition as the impugned expenses were already claimed by the assessee in the regular books of accounts and hence, the impugned additions were not justified in view of the cited judgment of Hon’ble Bombay High Court. The Ld. DR, while defending the additions, could not controvert this fact as raised by the Ld. AR.
We have carefully heard the rival contention and perused relevant material on record. In revenue’s appeal, we have already noted the strength in proposition raised by the Ld. AR and the same is supported by binding judicial precedents also as already cited by us in paragraph 8. The revenue could not rebut the contention that the impugned expenditure was not part of the regular books of accounts maintained by the assessee. Hence, following the same reasoning, we delete the impugned additions and allow assessee’s appeal. Since the appeal has been allowed on legal grounds, the necessity of going into the merits become merely academic in nature and hence, not delved into by us. Conclusion 3038, 3040 & 3077/Mum/2014 Sopariwala Exports Assessment Years-2004-05 to 2006-07 12. Finally, the three appeals filed by revenue stands dismissed whereas the assessee’s appeal stands allowed in terms of our above order.