2017 (7) TMI 1005 - HC - Income Tax

Applying transfer pricing formula - associate enterprises - Held that - Clause (i) would apply in a case where goods or articles are manufactured or transferred by one enterprise. In the present case, admittedly M/s. Blue Gems does not either manufacture or process any articles. It merely purchases rough diamonds from the international markets and supplies to the assessee. Clause (j) would apply when an enterprise is controlled by an individual. In the present case, both the enterprises are partnership firms. There is nothing to suggest that they are controlled by any individuals. Clause (l) would of course apply in a case where the enterprise is a partnership firm. However, for applicability of the said clause, there has to be an enterprise in the nature of a firm and another enterprise who holds not less than 10% interest in such firms. Such facts are also not applicable in the present case. The Tribunal in our opinion therefore committed no error in holding that the assessee and M/s. Blue Gems not being associate enterprises, the question of applying transfer pricing formula would not arise.

Summary

Issues:
1. Transfer pricing under Section 92A of the Income Tax Act, 1961.
2. Arm's Length Price Adjustment under Section 92CA(3).
3. Addition on account of unexplained Cash Credit under Section 68 and disallowance of interest paid.
4. Disallowance of provision of forward contract payable.

Transfer Pricing (Section 92A):
The appeal raised questions regarding the association between the assessee and M/s Blue Gems BVBA under Section 92A of the Income Tax Act. The Revenue claimed that both entities were closely related due to family control and should be considered associated enterprises. However, the Tribunal analyzed the provisions of Section 92A and concluded that the conditions for association were not met. The Tribunal found that M/s Blue Gems did not manufacture or process any articles, the enterprises were partnership firms not controlled by individuals, and the requirements of Clause (l) were not fulfilled. Consequently, the Tribunal held that the transfer pricing formula did not apply in this case.

Arm's Length Price Adjustment (Section 92CA(3)):
The appeal also questioned the deletion of the Arm's Length Price Adjustment made under Section 92CA(3). The Tribunal's decision to delete the adjustment was based on factual considerations and an examination of the material on record. Both the CIT(A) and the Tribunal ruled against the Revenue on this issue, emphasizing that it was a question of fact without any legal implications.

Unexplained Cash Credit and Disallowance of Interest:
Regarding the addition on account of unexplained Cash Credit under Section 68 and the consequential disallowance of interest paid, the High Court noted that these issues were purely factual in nature. The decisions made by the CIT(A) and the Tribunal were based on an assessment of the evidence presented, and both authorities ruled against the Revenue. As such, no legal questions arose from these matters.

Disallowance of Provision of Forward Contract Payable:
The final issue raised in the appeal was the deletion of the disallowance of the provision of forward contract payable. The High Court observed that this issue, like the previous one, was a question of fact determined by the lower authorities. Since both the CIT(A) and the Tribunal had ruled against the Revenue on this matter, the High Court concluded that no legal grounds existed for further consideration.

In conclusion, the High Court dismissed the tax appeal after a detailed analysis of each issue raised by the Revenue. The judgment highlighted the factual nature of certain disputes and affirmed the decisions made by the lower authorities in favor of the assessee.