Commissioner Of Income Tax, Jaipur-Ii, Jaipur v. M/S Jaipur Silver Jewels P. Ltd

HIGH COURT OF JUDICATURE FOR RAJASTHAN BENCH ATJAIPUR D.B. Income Tax Appeal No. 600 / 2011 COMMISSIONER OF INCOME TAX, JAIPUR-II, JAIPUR ----Appellant Versus M/S JAIPUR SILVER JEWELS P. LTD., 1/202, VIDYADHAR NAGAR,JAIPUR ----Respondent Connected With D.B. Income Tax Appeal No. 607 / 2011 COMMISSIONER OF INCOME TAX, JAIPUR-II, JAIPUR ----Appellant Versus M/S JAIPUR SILVER JEWELS P. LTD., 1/202, VIDYADHAR NAGAR, JAIPUR ----Respondent _____________________________________________________ For Appellant(s) : Mr. Prateek Kedawat for Mr. R.B. MathurFor Respondent(s) : Mr. Gunjan Pathak with Ms. Ishita Rawat _____________________________________________________ HON'BLE MR. JUSTICE K.S.JHAVERI HON'BLE MR. JUSTICE INDERJEET SINGHOrder 06/09/2017 In both these appeals common questions of law and factsare involved, hence, they are decided by this common judgment. 1.By way of both these appeals, the appellant has assailed thejudgment and order of the Tribunal whereby the Tribunal hasdismissed the appeal of the department confirming the order of CIT(A). 2.This Court while admitting the appeals framed the following questions of law:- “i) Whether in the facts and circumstances ofthe case, the ITAT was justified in holding thatM/s India Gems & Beads inc. is not anassociated enterprises without appreciating theprovisions of Section 92A(2)(m) of the Act. ii) Whether in the facts and in thecircumstances of the case, the ITAT wasjustified in holding that M /s India Gem & Beadsinc is not an associated enterprise withoutappreciating that the AO has also mentionedthat in this case provisions of section 92A (2)(m) are also involved & accordingly theassessee and M/s India Gem & Beads Inc washaving mutual interest and therefore was anassociatedc enterprise. No comment has beenmade by the Tribunal on this aspect.” 3.Counsel for the appellant has taken us to the order passed by the CIT(A) wherein it has been observed as under:- “1. Whether the assessing officer was justified inenhancing the total income of the appellant onaccount of transfer pricing adjustment. 1.1. On perusal of relevant portion of theassessment order it is noticed that on the basisof last year’s finding given in the assessmentorder dated 27.12.2006 the A.O has come to theconclusion that M/s India Gems and Beads INCUSA falls within the meaning of AssociatedEnterprises as per S.92A of the I.T. Act andfollowing the CUP method as most appropriatemethod to ascertain arm’s length price of semiprecious stones studded in silver jewellery andsold the aforesaid associated concern and on thisaccount worked out the transfer pricingadjustment of Rs. 75,66,093/-. 1.2. Challenging the said view of assessingofficer Sh. G.G. Mundra CA & AR of the appellantby referring the provisions of S.92A has arguedthat there is no material or evidence on recordthat the said India Gems and Beads is anassociated enterprises of appellant company. Inthis respect, the reliance has been placed upon CIT(A)’s order folr A.Y. 2004-05 dated 3.10.2007.He had further argued that the A.O failed toappreciate the distinct nature of the transactionsof the appellant while arriving at arm’s lengthprice based on CUP method which could not havebeen applied in the present facts of the casebecause no piece of gem and stone even of samecategory can be exactly comparable to otherbecause of various varieties, colour, lusture, size,cutting and other features therefore, the CUPmethod cannot be applied and even if somemethod has to be applied then it has to beTNMM.” CIT(A)’s order folr A.Y. 2004-05 dated 3.10.2007.He had further argued that the A.O failed toappreciate the distinct nature of the transactionsof the appellant while arriving at arm’s lengthprice based on CUP method which could not havebeen applied in the present facts of the casebecause no piece of gem and stone even of samecategory can be exactly comparable to otherbecause of various varieties, colour, lusture, size,cutting and other features therefore, the CUPmethod cannot be applied and even if somemethod has to be applied then it has to beTNMM.” 4.He further contended that the CIT(A) and Tribunal both havewrongly interpreted the provisions of S.92A of the Income Tax Actand the same requires consideration. For the purpose of Section92A(2)(i), (j), (m) & (f) associated enterprises means other thenestablished associated enterprise. However, while considering thesame counsel for the respondent has pointed out that the Tribunaland the CIT(A) in para 1.3 has rightly considered the statutoryrules which are applicable and followed the same. The Tribunalwhile considering the same held as under:- “7. On the basis of aforesaid reason, the AOdrawn a conclusion that there exists arelationship between the assessee and M/s.India Gems & Beads of mutual interest specifiedunder section 92A(2)(m). Thereafter, in order toascertain ALP of international transactions, theassessee company ws asked to work out thecost of material sold to the said associatedconcern vis-a-vis otherr concern. The AOfurther observed that assessee failed to explainthe ALP method instead of allowing more thanadequate opportunity. Thereafter, the AO hasgiven a finding that the sale price of samegoods to unconnected parties is available.Therefore, the most suitable method ofdetermining the ALP is Comparable UncontrolledPrice Method as given in section 92C(1)(a).Finally while determining the ALP as per CUP method, he observed that the average saleprice of silver portion in the jewellery is thesame as in the case of M/s. India Gems &Beads. USA and in the cases of other concerns.However, in the case of stones, studded in saidjewellery. When it was sold to oter concern, theaverage sale price was shown at Rs.40/- pergram while in case of India Gems & Beads itwas shown at Rs.8.10 per gram. On this basis,the AO worked out such price of studded stoneat Rs.2,10,42,416/- instead of Rs.42,57,078/-shown by the assessee. Accordingly, the AOworked out the addition on this account forbalance amount at Rs.1,67,85,338/-. Detailedwritten submissions were filed before ld.CIT(A). It was submitted that adjustment madeby AO is beyond the provisions of section 4 readwith section 2(24) of the Act. It was submittedthat M/s. India Gems & Beads. USA is not anassociated enterprise of the assessee within themeaning of section 92A(2)(i)(j)(m) of the Act.No conditions are satisfied as specified insection 92A between the assessee and M/s.India Gems & Beads, USA for treating thetransaction for the purpose of ALP. None of thetwo tests specified in section 92A are satisfied.No evidence has been put on record by the AOto hold that the sale price is influenced by M/s.India Gems & Beads. It was further submittedthat in order to consider it as associatedconcern, if one enterprise is controlled by anindividual and other enterprise is also controlledby the said individual or his relative, then onlythe said relationship exists. But in the presentcase neither such relationship exists nor suchcontrol exists. It was also submitted that noneof the conditions specified under section (3) ofSection 92C were satisfied in the present case.It was explained that in fact the price per gramof silver realized from M/s. India Gems & Beadswas better than from the export to otherparties. The CUP method is not applicable in thefacts of the present case. The only availablemethod, if provisions are applicable is TNMmethod, according to which the operating netprofit margin shown by assessee was 11.69%as against such margin of uncontrolledenterprise in India having similar functionalactivities where such margin was 6.17%. Theexplanation offered on behalf of the assesseewas sent to the AO along with full paper bookfor this report. In remand report it was submitted that Smt. Anupama Singh who is soleshareholder of M/s. India Gems & Beadshappens to be sister-in-law (brother's wife) ofShri Vinay Pratap Singh who is director of thecompany Accordingly, it makes crystal clear thatcondition as enumerated in section 92A(2)(j) issatisfied in the assessee's case. It was furthersubmitted that the above conclusion takes morestrength by the fact that the premise fromwhere M/s. India Gems & Beads Inc., USA isowned by Shri Dharam Pal Singh who is brotherof Shri Vinay Pratap Singh. Moreover, Shri VinayPratap Singh or M/s. India Gems & Beads Inc.Does not pay anything for occupying/using saidpremise. Apparently M/s. India Gems & BeadsInc. Is a sister concern of M/s. Jaipur SilverJewels Pvt. Ltd. And undoubtedly falls withinthe meaning of associated concern as persection 92A of the Act. Thereafter another letterwas issued to the AO to submit specific reportthat on what basis the finding has been giventhat M/s. India Gems & Beads Inc., USA iscovered within the meaning of AssociatedEnterprises as referred in section 92A of theAct. He was also requested to explain how theALP was ascertained without making anyreference to TPO which could have been madeas per CBDT's instructions, if transactions withAssociated Enterprise were exceeding Rs.5Crores. In this respect it was clarified that thetransaction was below Rs. 5 crores and,therefore, no reference was made to TPO. Thereply received from AO was sent to theassessee for its comments and the commentswere received from the assessee's side, whichare mentioned at pages 8 & 9 of ld. CIT (A)'sorder. 8. After considering the reply and comments ofthe AO, the ld. CIT(A) found that thetransactions entered between assessee andM/s. India Gems & Beads Inc., USA are notcovered under section 92A for the purpose ofapplying ALP. Accordingly, he deleted the entireaddition made by the AO. 9. The ld. D/R who appeared before the Tribunalfiled a detailed written submissions. Reliancehas been placed on various case laws, copies ofwhich are filed along with the writtensubmissions. The written submissions wereexplained also. It was explained that Smt. Anupama Singh who is sole shareholder of M/s.India Gems & Beads Inc. Is wife of brother ofthe Director of the Company. The company iscontrolled by father-in-law of Smt. AnupamaSingh, brother-in-law shri Vinay Pratap Singhand, therefore, they are relatives andaccordingly the AO was correct in holding M/s.India Gems & Beads Inc. As an associatedenterprise of the assessee company. Detailedwritten submissions were explained by ld. D/R. 10. On the other hand, the ld. Counsel of theassessee firstly placed reliance on the order ofld. CIT(A). Further attention of the Bench wasdrawn on provisions of section 2(41) wheredefinition of relative is prescribed. The definitionof relative provided under section 2(41) wasread also. Accordingly it was submitted thatthere is no relationship between the Director ofthe assessee company with Smt. AnupamaSingh, the proprietor of M/s. India Gems &Beads Inc. Therefore, the order of ld. CIT(A)does not suffer from any infirmity. It wasexplained that TNM method is correctly appliedby ld. CIT(A) as CUP method is not applicableon the facts of the case. It was explained thatprovisions of section 92A(2)(i)(j)(m) & (f) arenot applicable and accordingly the order of ld.CIT(A) is liable to be sustaineed. 11. The ld. D/R in reply asked one day's time torebut the contention of ld. A/R. However, thecase was taken as heard and the ld. D/R wasallowed to file reply if he likes upto 29[th]November,2010. However, no reply has beenfiled on behalf of the department. Therefore,this ground is disposed off after taking intoconsideration the arguments advanced on thedate of hearing i.e. on 26.11.2010. 11. The ld. D/R in reply asked one day's time torebut the contention of ld. A/R. However, thecase was taken as heard and the ld. D/R wasallowed to file reply if he likes upto 29[th]November,2010. However, no reply has beenfiled on behalf of the department. Therefore,this ground is disposed off after taking intoconsideration the arguments advanced on thedate of hearing i.e. on 26.11.2010. 12. After taking into considerationthesubmissions of both the sides, we find that ld.CIT(A) was justified in holding that transactionsentered into between the assessee and M/s.India Gems & Beads Inc. Are not internationaltransaction for the purpose of adjustment underALP. The AO heavily placed reliance on theprovisions of section 92A(2)(j) which reads asunder:- "Where one enterprise is controlled by anindividual, the other enterprise is also controlledby such individual or his relative or jointly bysuch individual and relative of such individual." The definition of individual is provided undersection 2(41) of the Act which reads as under:-"Relative in relation to an individual, means thehusband, wife, brother or sister or any linealascendant or descendant of that individual." After going through the relevant provisions ofsection 92 for the purpose of adjustment underALP and after going through the definitionprovided under section 2(41), it is abudantlyclear that Smt. Anupama Singh is not relative ofthe Director of the assessee company for thepurpose f adjustment under ALP. The AO hasstated that the premises at USA is used by Smt.Anupama Singh and Shri Vinay Pratap Singhjointly without paying any rent. There is no barto use a premises owned by a third personjointly or severally. However, what isrequirement of law for attracting theinternational transaction for the purpose of ALPis that the person should be a relative for thepurpose of ascertaining the associated concernas proviede under section 2(41). Provisions ofsection 2(41) by which definition of relativeprovided are very clear. Therefore, there is noquestion of holding the transaction betweenassessee company and India Gem & Beads Inc.,USA as associated concern as proveded undersection 92A(2)(j). 13. We have also seen other provisions ofsection 92 and found that they are also notapplicable on the facts of the present case.Therefore, we hold that ld. CIT (A) was justifiedin holding that the assessee company is notcovered under section 92A(2)(j) of the Actwithin the meaning of associated enterprise. Wefurther noted that without prejudice to abovefinding, the finding of ld. CIT(A) that AO has notapplied the various method to work out ALP asper various methods specified under section92C of the Act read with relevant rules andOECD guide lines whatsoever. In the presentfacts of the case even if some method was to beapplied it could have been TNM methodspecified under section 92(1)(c) of the Act. TheAO has not made any exercise of ascertainingoperating net profit margin of uncontrolledenterprises who are other related companies inIndia having similar functional activities whichhave been shown in the appellate proceedingsat 6.17% as against operating net profit marginof the assessee at 11.69%. These findings of ld. CIT(A) remained uncontroverted as nothingconcrete have been brought on record either byAO or by ld. D/R during the appellateproceedings. Therefore, in view of the abovefacts and circumstances and in view of thereasoning given by ld. CIT(A), we confirm thefinding lf ld. CIT(A) in this respect.” 5.We have heard counsel for both the sides. 6.Taking into consideration that sister in law is not associated nor relative under the Income Tax Act, in that view of the matter,the provision of Section 92A (2)(m) is wrongly interpreted by theAO, whereas the Tribunal and CIT(A) have rightly interpreted thesame. CIT(A) remained uncontroverted as nothingconcrete have been brought on record either byAO or by ld. D/R during the appellateproceedings. Therefore, in view of the abovefacts and circumstances and in view of thereasoning given by ld. CIT(A), we confirm thefinding lf ld. CIT(A) in this respect.” 5.We have heard counsel for both the sides. 6.Taking into consideration that sister in law is not associated nor relative under the Income Tax Act, in that view of the matter,the provision of Section 92A (2)(m) is wrongly interpreted by theAO, whereas the Tribunal and CIT(A) have rightly interpreted thesame. 7.In that view of the matter, since both the issues are inter-connected therefore, both the issues are answered in favour of theassessee against the department. 8.The appeals stand dismissed. (INDERJEET SINGH)J. (K.S.JHAVERI)J. A.Sharma/91-92