2010 (9) TMI 1261 - AT - Income Tax

Summary

Issues Involved:
1. Deletion of trading addition of Rs. 15,31,790 made by the assessing officer on account of deduction u/s 10B of the Act.
2. Deletion of addition of Rs. 12,69,701 made by the assessing officer on account of ALP.

Summary:

Issue 1: Deletion of Trading Addition of Rs. 15,31,790 u/s 10B

The revenue's first grievance concerns the deletion of a trading addition of Rs. 15,31,790 made by the assessing officer on account of deduction u/s 10B of the Act. The Assessee, engaged in manufacturing precious and semi-precious stones, showed a GP rate of 27.06% and a net profit rate of 22.97%, while its sister concern, M/s V. Rajendra Exports, showed a GP rate of 11.65% and a net profit rate of (-) 11.48%. The assessing officer suspected profit diversion to claim higher deductions u/s 10B and issued a show-cause notice. The Assessee argued that there were no transactions between the two firms and that their business activities were not comparable. The assessing officer, however, clubbed the turnovers and recalculated the profits, leading to the disallowance of Rs. 15,31,790.

The Tribunal found that the assessing officer failed to establish a close connection between the Assessee and M/s V. Rajendra Exports as required u/s 80-IA(10). The Assessee's GP rate was consistent with the previous year, and the assessing officer did not provide substantial evidence to justify the profit apportionment. The Tribunal upheld the learned Commissioner (Appeals)'s decision to delete the addition, emphasizing the rule of consistency and the lack of material evidence for profit diversion.

Issue 2: Deletion of Addition of Rs. 12,69,701 on Account of ALP

The second grievance pertains to the deletion of an addition of Rs. 12,69,701 made by the assessing officer on account of ALP. The Assessee sold goods to M/s Pioneer Gems, New York, a concern of a related party. The assessing officer applied the CUP method and determined the ALP at Rs. 173.91 per carat, compared to the sale price of Rs. 145.42 per carat to M/s Pioneer Gems, leading to the addition.

The Tribunal noted that the learned Commissioner (Appeals) found the average sale rate method inappropriate for gem stones, where value varies significantly. The assessing officer's adjustments lacked justification, and the Assessee's higher GP rate contradicted the claim of non-arm's length pricing. The Tribunal agreed with the learned Commissioner (Appeals) that the assessing officer did not fulfill the requirements of Section 92C(3) and failed to establish that M/s Pioneer Gems was an AE u/s 92A. The Tribunal upheld the deletion of the addition, emphasizing the need for proper quality adjustments and timely receipt of sale proceeds.

Conclusion:

The appeal of the revenue was dismissed, with the Tribunal upholding the learned Commissioner (Appeals)'s decisions on both issues.