Pr. Commissioner Of Income Tax, Jaipur-Ii, Jaipur v. M/S. Vedansh Jewels Pvt. Ltd., H

HIGH COURT OF JUDICATURE FOR RAJASTHAN BENCH ATJAIPUR D.B. Income Tax Appeal No. 271 / 2017 Pr. Commissioner of Income Tax, Jaipur-II, Jaipur. ----Appellant Versus M/S. Vedansh Jewels Pvt. Ltd., H-20, Bhagat Singh Marg, Jaipur ----Respondent Connected With D.B. Income Tax Appeal No. 272 / 2017 Pr. Commissioner of Income Tax, Jaipur-II, Jaipur. ----Appellant Versus M/S. Vedansh Jewels Pvt. Ltd., H-20, Bhagat Singh Marg, Jaipur ----Respondent _____________________________________________________ For Appellant(s) : Mr. K.D. Mathur & Mr. Prateek Kedawat for Mr. R.B. Mathur For Respondent(s) : _____________________________________________________ HON'BLE MR. JUSTICE K.S. JHAVERI HON'BLE MR. JUSTICE VIJAY KUMAR VYASJudgment 24/10/2017 1.In both appeals common questions of law and facts areinvolved, hence, they are decided by this common judgment. 2.By way of the appeals, the department has assailed thejudgment and order of the Tribunal whereby the Tribunal hasallowed the appeal of the assessee modifying the order of CIT(A). 3.Counsel for the appellant has framed the following questions of law:- In DBITA No. 271/2017 “i) Whether on the facts and in circumstances ofthe case, the ITAT was justified in law in holdingthat surplus amount in the freight export accountand in the insurance export of Rs. 1830488/- isderived from export activities and on thoseamounts deduction u/s 10AA is allowable. ii) Whether on the facts and in circumstances ofthe case, the ITAT has failed to appreciate the factas brought on record by the Assessing Officerregarding disallowance of deduction u/s 10AA ofdeemed profit of Rs. 5021944/- not eligible fordeduction u/s 10AA of the Income Tax Act, 1961. In DBITA No. 272/2017 “i) Whether on the facts and in circumstances ofthe case, the ITAT was justified in law in holdingthat surplus amount in the freight export accountand in the insurance export of Rs. 2017500/- isderived from export activities and on thoseamounts deduction u/s 10AA is allowable. ii) Whether on the facts and in circumstances ofthe case, the ITAT has failed to appreciate the factas brought on record by the Assessing Officerregarding disallowance of deduction u/s 10AA ofdeemed profit of Rs. 23314854/- not eligible fordeduction u/s 10AA of the Income Tax Act, 1961. 4.Counsel for the appellant contended that the Tribunal hasseriously committed an error in reversing the finding arrived at bythe CIT(A) and after considering the case of the assessee hasobserved as under:- “4.3.1. I have perused the facts of the case, theassessment order and the submissions of theappellant. In the appellant company, both ShriAshok Goyal and his wife hold 50% of the shares,each. The nature of business of the appellantcompany is manufacture of studded jewellery andits export. The appellant has claimed exemptionu/s 10AA on this export turnover. Shri AshokGoyal is also the proprietor of M/s Dwarka Jewels which is engaged also in the business ofmanufacture of studded jewellery and its sellsthem- both locally as well as for export. Theprofits of M/s Dwarka Jewels, are fully taxable. 4.3.2. M/s Dwarka Jewels has been engaged inthe above business for a long time whereas theappellant company has started its business, a fewyears ago. The appellant company primarilypurchases raw silver, silver Khokha, semi-preciousstones from M/s Dwarka Jewels. It also gets jobwork of silver khokhas done from M/s DwarkaJewels. During the year, the appellant has madepurchases from M/s Dwarka Jewels of Rs.5,76,86,690/- and it has got job work done fromM/s Dwarka Jewels amounting to Rs. 10,48,172/- which is engaged also in the business ofmanufacture of studded jewellery and its sellsthem- both locally as well as for export. Theprofits of M/s Dwarka Jewels, are fully taxable. 4.3.2. M/s Dwarka Jewels has been engaged inthe above business for a long time whereas theappellant company has started its business, a fewyears ago. The appellant company primarilypurchases raw silver, silver Khokha, semi-preciousstones from M/s Dwarka Jewels. It also gets jobwork of silver khokhas done from M/s DwarkaJewels. During the year, the appellant has madepurchases from M/s Dwarka Jewels of Rs.5,76,86,690/- and it has got job work done fromM/s Dwarka Jewels amounting to Rs. 10,48,172/- 4.3.3. The Assessing Officer found that the grossprofit rate of Dwarka Jewels on its transactionswith the appellant is much lower than gross profitrate with concerns other than the appellant. Onthe basis of a detailed discussion, given in para4.5 of the assessment order, the Assessing Officerheld that owing to the close connection betweenthe assessee and M/s Dwarka Jewels, thebusiness between them was so arranged that thebusiness transacted between them produced tothe assessee more than ordinary profit. TheAssessing Officer therefore, invoked theprovisions of Section 10AA(9) r.w.s. 80IA(10). Theappellant has denied that there was anyarrangement or that it enjoyed more thanordinary profit. 4.4. The issue which therefore, requiresadjudication is whether the course of businessbetween the appellant and Dwarka Jewels havebeen so arranged that these transactions haveproduced for the appellant more than ordinaryprofit which might be expected to arise. There arethree aspects which require examination:- (a) whether there is a close connection betweenthe appellant and M/s Dwarka Jewels (b) whether the course of business between theappellant and Dwarka Jewels has been arrangedand (c) whether this arrangement has produced forthe appellant more than ordinary profit whichmight be expected to arise.” 5.He further contended that the observations made by theTribunal are contrary to law. 6.We have heard to counsel for the appellant. 7.Taking into consideration, the observations made by theTribunal which reads as under:- “5.4. A similar view has been taken by the Hon’bleKarnataka High Court in case of CIT vs. H.P. GlobalSoft ltd. 342 ITR 263, in the context of section10A(6) read with section 80-1(9) which is pari-materia to section 80IA(10), wherein it was heldthat there has to be a material to indicate thatcourse of business had been so arranged as toinflate profits and in absence of the same, it declinedto interfere with the findings of the Tribunal. Therelevant findings are reproduced as under:- 5.He further contended that the observations made by theTribunal are contrary to law. 6.We have heard to counsel for the appellant. 7.Taking into consideration, the observations made by theTribunal which reads as under:- “5.4. A similar view has been taken by the Hon’bleKarnataka High Court in case of CIT vs. H.P. GlobalSoft ltd. 342 ITR 263, in the context of section10A(6) read with section 80-1(9) which is pari-materia to section 80IA(10), wherein it was heldthat there has to be a material to indicate thatcourse of business had been so arranged as toinflate profits and in absence of the same, it declinedto interfere with the findings of the Tribunal. Therelevant findings are reproduced as under:- “12. Insofar as the question of the profit fromsoftware manufacturing export units, i.e. the twosoftware export units of the assessee is concerned,the Appellate Commissioner opined that therequirements of the provisions of Section 80-I(9) theAct is two fold, that not merely there should be aclose connection between the assessee-companyand the foreign buyer which may be a reason forassessee for indulging in boosting its profits orproportionate profit margin from the export activityof the notified items, but also that there should bematerial to indicate that the assessee had indulgedin an arrangement with its foreign buyer so as toproduce to the assessee more profits than ordinarilywhat profits the assessee might have expected toarise from out of such business and the AssessingOfficer having not indicated any material or evidenceto disclose any such arrangement between theassessee and its foreign buyer, held that, there is noreason to reject the profit attributable to such unitsas claimed by the assessee and as indicated in itsprofit and loss account statement, which accordingto the Appellate Commissioner was one conformingto the profit margin as was prevalent in othersoftware manufacturing units which were alsoexporting the software created by it and claimingSection 10A benefit. The Appellate Commissionerapplied this view for all the four assessment years ofthe assessee.” 24. Insofar as the first question is concerned, whileit is true that there did exist a close connection between the assessee-company and the foreignbuyer and it is not disputed that the otherrequirement such as the nature of arrangement andthe manner of rejection of the profits margin due toexport sales as inflated profits attributable to exportactivities, having not been disclosed by theAssessing Officer arid though considerable reliance isplaced by the learned counsel for the respondent onthe judgment of the Supreme Court, while it is truethat to some extent these two provisions areanalogous (S.42 and Section 80-I(9) of the Act) thequestions that were examined in the judgment ofthe Supreme Court were not on the so-calledarrangement aspect, but mainly as to the deemingprovision operating against the resident or the non-resident and also as to the manner of businessactivity and existence of the business connectionwhich argument on behalf of the assessee wasnegatived. “25. The course of business was so arranged thatthe business transaction between two units of theassessee which might expected to arise in thebusiness undertaking or the hotel. The word‘appears’ cannot be taken in isolation de hors thequalifying words or ‘so arranged’ with the businessmore than the ordinary profits. While on the firstaspect there is not much dispute. The secondrequirement viz, it is a course of business is soarranged as to result in an inflated profit is notforthcoming from the order of the Assessing Officerand unfortunately for the Revenue the findings ofthe Appellate Authority which also go into the factsis that the profit margin as revealed by the assesseeis a reasonable profit margin in comparison to othersimilar units. Ultimately, there being no material toindicate that the course of business had been soarranged as to inflate profits, i.e. to show a higherprofit margin to answer the question in favour of theRevenue, but the only answer can be that theTribunal was justified in taking this view andtherefore, the first question is answered in theaffirmative and in favour of the assessee and againstthe Revenue.” 5.10. In our view, what is relevant to determine andhas to be examined, in the instant case, is thecourse of arrangement in the context of the businesswhich has actually been transacted between this twoentities during the year which has resulted in morethan ordinary profits to the assessee company. Thebusiness transactions which have actually happenedduring the year under consideration relates to 70% of the purchases made by the assessee companyfrom M/s Dwarka Jewels and the job work chargespaid to M/s Dwarka Jewels. In the context of thesetwo type of transactions, it has to be proved thatthere was an arrangement between these twoentities or there was manipulation which was carriedout and such a manipulation has to be shown toexist through demonstrable and credible evidencethat these transactions were intentionally made atrelatively lower rate than the rate prevailing in themarket for the same products or the services availedby the assessee company. The assessee companyhas submitted before the lower authorities thatprices charged by M/s Dwarka Jewels in respect ofsilver supplied to the assessee company is at theprevailing market price of the raw silver andsimilarly the job work charge in respect of silverKhokhas were also paid at the prevailing marketprice. The said facts are on records and have notbeen controverted by the lower authorities. Further,there is no independent exercise carried out by theAO to rebut the submissions of the assesseecompany. Once the assessee has demonstrated thatthe price charged for silver and job work charges isat prevailing market price, it is for the AO to eitheraccept the same or in a scenario, where the AO is ofthe prima facie view that such prices are not theprevailing market prices and has some concerns inaccepting the same, he has to bring on recordcomparable data involving purchase of similarproducts and services and the price prevailing in theopen market. However, there is no such comparabledata which has been brought on record by theRevenue. In absence of the same, there is nomaterial which is available on record to demonstrateexistence of an arrangement between these twoentities which has resulted in more than normalprofit. Hence, the provisions of section 80IA(10)cannot be invoked in the instant case. 5.11. There is another aspect of the matter whichwe have noted after review of the assessmentrecords. The authorities below have compared theprofit earned by M/s Dwarka Jewels and the profitearned by the assessee company to hold that sinceassessee is earning higher profits, the pricescharged by M/s Dwarka Jewels is at a very low pricewhich has resulted in exorbitant profits in the handsof the assessee company. This is again a wrongapproach undertaken by the authorities. As we havestated above, the arrangement is a cause and thehigher profit is the effect. The high profit mustnecessarily be the consequence of such an arrangement. The AO has to first show that thetransactions were specially arranged to producemore than ordinary profits to the assessee companyand the high profit is the end point of such anexercise. In absence of an arrangement, merelyearning higher profits cannot be basis to invoke theprovisions of section 80IA(10) of the Act. 5.12. Assuming that for sake of discussions, thereexisted an arrangement in respect of specifiedbusiness transaction between these two connectedentities, another aspect of the matter which has tobe considered is what is the measure available andemployed by the Revenue for determining more thannormal profits in the hands of the assesseecompany. The authorities below have compared theprofit earned by M/s Dwarka Jewels and the profitearned by the assessee company to hold that sinceassessee is earning higher profits, the pricescharged by M/s Dwarka Jewels is at a very low pricewhich has resulted in exorbitant profits in the handsof the assessee company. This is again a wrongapproach undertaken by the authorities. What has tobe seen and examined is the profits earned byunrelated third party entities engaged in the same orsimilar line of business of export of gems andjewellery and operating in the same or similarbusiness conditions. And if there are variations in theprofits reported by the assessee company and theseunrelated third party entities, it could give a startingpoint to the AO to carry out further investigation, aswe have held above, to examine whether there existan arrangement or not. The assessee company hasin fact submitted some comparable data in respectof Jagdish Prasad Soni and Green Fire Export todemonstrate that the profits reported arecomparable. However, the same has not beenexamined by the lower authorities. On this accountalso, the contention of the Revenue cannot beaccepted that the assessee has earned more thannormal profits. 5.13 In light of above discussion and in the entiretyof the facts and in the circumstances of the case, weare of the view that there is no evidencedemonstrating the existence of any arrangementbetween the assessee company and M/s DwarkaJewels aimed at producing more than normal profitin the hands of the assessee company. Hence, theaction of the authorities in invoking provisions ofsection 10AA(9) read with section 80IA(10) cannotbe sustained. In the result, the consequent additionsmade by the Assessing Officer and partly upheld by the ld. CIT(A) is hereby deleted. In the results,grounds taken by the assessee are allowed andground of the revenue is dismissed. 6.1 Briefly the facts of the case are that the ld. A.O.disallowed the deduction u/s 10AA of Rs.20,17,500/-for A.Y. 2010-11 in respect of the amount comprisingsurplus of freight, Insurance charges and Misc.Balances w/off on the allegation that the sameconstituted indirect income not derived from exportof goods. the ld. CIT(A) is hereby deleted. In the results,grounds taken by the assessee are allowed andground of the revenue is dismissed. 6.1 Briefly the facts of the case are that the ld. A.O.disallowed the deduction u/s 10AA of Rs.20,17,500/-for A.Y. 2010-11 in respect of the amount comprisingsurplus of freight, Insurance charges and Misc.Balances w/off on the allegation that the sameconstituted indirect income not derived from exportof goods. 6.8 The next question that arises for consideration isthe definition of export turnover which has beendefined in explanation 1 to section 10AA of the Actand whether the same would have any effect in theinstant case. The term “export turnover” has beendefined as consideration in respect of export by theundertaking, being article or thing received in orbrought into India by the assessee but doesn’tinclude freight, telecommunication charges orinsurance attributable to the delivery of the articlesor things outside India. In our view, the same maynot have any effect as where the freight or insurancecharges are reduced from the export turnover, thesame have to be reduced from the total turnover aswell. The same has been the consistent stand of thevarious Coordinate Benches. 6.9 In light of above discussions and in the entiretyof facts and circumstances of the case, we donot findany infirmity in the order of the ld CIT(A) andconfirm the allowance of exemption under section10AA in respect of freight and insurance excessreceipts. On parity of reason, the same positionwould hold good for misc balances written off. In theresult, the ground no.1 of the revenue is dismissed. 8.We are in complete agreement with the view taken by the Tribunal. 9.The findings arrived at by the Tribunal is just and proper. No substantial question arises in the appeals. 10.Hence, the appeals stand dismissed. (VIJAY KUMAR VYAS)J. A.Sharma/41-42