2017 (3) TMI 968 - AT - Income Tax

Disallowance of discount charged on the ground of alleged transfer of profits to associate concerns - Held that - From the perusal of the average rates calculated from the two charts wherein one relates to job rate work charged to sister concerns and the other to the outside parties we observe that the average rates in both the cases is ₹ 71 per carat. In order to examine the reasonableness of the rate of job work charges charged to the sister concerns the same can be compared with the other comparables in the form of job work rate charged to outside parties and we find that the average rates charged to the sister concern are at par with the average rate charged to outside parties. We also find that with the total diamond processed for the associated concern is 217024 carats for which the assessee has realized ₹ 16029035/- and if we calculate the average rate per carat charged to associate concerns it comes out to ₹ 73.86 per carat which is higher than the average rate of ₹ 71 calculated above. We are, therefore, of the view that in the given facts and circumstances of the discussion made above, net job work rates (after providing discount) charged by the assessee to its associate/sister concerns are reasonable with regard to the fair market value of the services. We, therefore, delete the impugned disallowance sustained by ld. Commissioner of Income Tax(A). - Decided in favour of assessee

Issues Involved:
1. Non-compliance with ITAT directions by CIT(A).
2. Disallowance of discount claim amounting to ?13,32,885/- due to alleged profit transfer to associate concerns.

Issue-wise Detailed Analysis:

1. Non-compliance with ITAT directions by CIT(A):
The appellant argued that the CIT(A) did not follow the ITAT's directions from the appellate order dated 27-11-2009, which set aside the assessment. The appellant requested the appellate order be quashed as invalid and void ab initio due to this non-compliance.

2. Disallowance of Discount Claim:
The appellant contended that the CIT(A) erred in confirming the disallowance of a discount claim of ?13,32,885/-, alleging it was a transfer of profits to associate concerns. The appellant prayed for the deletion of this disallowance and acceptance of the returned income as the correct total income.

Detailed Analysis:

Background:
The case pertains to the second round of litigation for the assessment year 2001-02. The assessee, a partnership firm engaged in laser sawing of diamonds, initially filed a return declaring an income of ?59,97,900/-. The Assessing Officer (AO) assessed the income at ?92,58,720/- after disallowing a discount claim of ?32,60,820/- due to alleged profit transfer to associated concerns. The CIT(A) initially deleted the disallowance, but the ITAT restored the issue to the AO for fresh adjudication.

ITAT's Directions:
The ITAT directed the AO to examine whether the net job charges realized from sister concerns were in accordance with prevailing market rates. The ITAT noted that neither party provided material to compare rates charged to other parties with those charged to sister concerns. The ITAT emphasized examining the genuineness of the discount and comparing job charges with market rates.

Second Round of Assessment:
In the second round, the AO disallowed the discount claim of ?33,68,820/- to sister concerns, concluding that the post-discount job-work rates were lower than those charged to outside parties. The AO deemed the discount excessive and unreasonable, suggesting it was a means to suppress income and gain undue tax benefits.

CIT(A) Order:
The CIT(A) partially upheld the AO's disallowance, restricting it to ?13,32,885/-. The CIT(A) compared rates charged during three distinct periods and found that during September to December 2000, rates charged to sister concerns were lower than those to outsiders. The CIT(A) concluded that a reasonable rate for the entire year should be ?80 per carat, resulting in an addition of ?13,32,885/-.

Tribunal's Findings:
The Tribunal observed that the AO's disallowance was based on Section 40A(2)(a) of the Income-tax Act, which allows disallowance if expenditure is excessive or unreasonable compared to fair market value. The Tribunal examined the average rates charged to sister concerns and outside parties, finding them comparable. The Tribunal noted that the average rate charged to sister concerns was ?71 per carat, similar to the average rate charged to outside parties. The Tribunal concluded that the net job work rates charged to sister concerns were reasonable and deleted the disallowance of ?13,32,885/-.

Conclusion:
The Tribunal allowed the appeal, finding that the net job work rates charged to sister concerns were reasonable and in line with market rates. The disallowance of ?13,32,885/- was deleted, and the appeal was allowed. The order was pronounced in open court on 20th March 2017.

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