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TMI Blog2015 (6) TMI 94X X X X Extracts X X X X X X X X Extracts X X X X ..... areholder of the assessee company and also is a Director and Chief Operating Officer of Kaybee Exim Pte Limited, Singapore. Therefore, Mr. Govind Karunakaran is not only participates in management of both the companies by he is holding the key position in the management of Kaybee Exim Pte Limited, Singapore and is part of decision making process of the said company since 1996. Shri Govind Karunakaran is a common director in both the company and participating in the management of both the companies not for the name sake but he is holding the key position in taking decision being a Chief Operating Officer of Kaybee Exim Pte Limited, Singapore and almost the entire shareholding of the assessee company, therefore, the condition of one enterprise participates directly or indirectly or through one or more intermediaries in its management or control or capital as prescribed under clause (a) & (b) of s.s. (1) of section 92A is satisfied. Hence, the assessee and Kaybee Exim Pte Limited, Singapore falls under the meaning of AEs as per the provisions of section 92A. - Decided against assesse. TP adjustment on account of service charges/commission received by the assessee in respect of proc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hri Madhur Agarwal For The Respondent : Shri N. Padmanban ORDER PER VIJAY PAL RAO, J.M. : This appeal by the assessee is directed against the order dated 26-03-2014 of ld. CIT(A)- 15, Mumbai for A.Y. 2008-09. 2. The assessee has raised the following grounds of appeal:- 1. Under the facts and circumstances of Appellant's case and in law, the learn Commissioner of Income-Tax (Appeal)-15 ['CIT(A)'] grossly erred in upholding addition of ₹ 1, 13,21,9021- made by the Ld. Assessing Officer (AO') u/s 92 of Income-Tax Act, 1961 (Act') when the appellant does not fall within the ambit of said section 92 of the Act. 2. Under the facts and circumstances of Appellant's case and in law, the Ld. CIT(A) grossly erred in holding that the order of Ld. AO u/s 143(3) is legal and valid even though Ld. AO did not issue the mandatory written show cause notice as per 2nd proviso to section 92C(3) of the Act. 2.1 The Ld. CIT(A) grossly erred in holding that Ld. AO has complied with the provision of 2nd proviso to section 92C(3) in the impugned assessment proceeding in the appellant's case. 2.2 The Ld. CIT(A) grossly erred in holding ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reciating the legal position emerging from the Appellants' authenticated and relevant documentary evidences filed before him for the relevant period in the course of appellate proceedings regarding the shareholding and directorship of the Appellant. 4. Under the facts and circumstances of Appellant's case and in law, the Ld. CIT(A) grossly erred in upholding the arm's length brokerage rate for yarn product at 2% as determined by Ld. AO as against 0.75% actually received by the appellant. 4.1 The Ld. CIT(A) grossly erred in not appreciating that the comparable instance of 2% brokerage rate adopted by Ld. AO cannot be taken as a comparable instance because its appellant's own alleged international transaction with its alleged AE and hence it does not represent an arm's length price as defined u/s 92F(ii) of the Act. 4.2 The Ld. CIT(A) grossly erred in rejecting the market driven uncontrolled comparable instances of yarn brokerage rates ranging from 0.5% to 0.75% of shipment value furnished by the Appellant. 4.3 The Ld. CIT (A) grossly erred in holding that Ld. AO can determine arm's length price based on estimation and best judgment without appreci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Deepak Gurnani and Mr. Rajesh Pillai are also Directors of the assessee company. The assessee replied to the notice vide its letter dated 14-12-2010 and submitted that the assese and Kaybee Exim Pte Limited, Singapore do not fall within the ambit of section 92A of the Act. After considering the list of Directors since its inception, the A.O. held that the assessee and Kaybee Exim Pte Limited, Singapore are AEs in terms of section 92A of the Act. To arrive at the conclusion that the assessee and Kaybee Exim Pte Limited, Singapore are AEs, the A.O. has referred various information obtained from the Website of the Kaybee Group as well as the fact that Mr. Vikram Kumar Chand the promoter of the assessee company transferred his share holding in favour Mr. Govind Karunakaran in the year 2006. Mr. Vikram Kumar Chand is also Managing Director of Kaybee Exim Pte Limited, Singapore. Apart from this, Mr. Govind Karunakaran is Director in both the companies, therefore, the A.O. held that these two companies are AEs in terms of section 92A(1) as well as 92A(2) of the Act. The assessee challenged the action of the A.O. before the ld. CIT(A) and contended that the assessee and Kaybee Exim Pte Li ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under clause (a) (b) of s.s. (1) of section 92A have to be read in conjecture with the criteria prescribed in clause (a) to (m), s.s. (2) of section 92A. The ld. Sr. counsel has asserted that post amendment of section 92A vide Finance Act, 2002, the meaning of AE as per s.s. (1) of section 92A is subject to the fulfillment of the criteria specified in s.s. (2) of section 92A. The ld. Sr. counsel has referred to the shareholding of the assessee as well as Kaybee Exim Pte Limited, Singapore and submitted that there is no common shareholding of these two companies, therefore, none of the criteria provided under s.s. (2) of section 92A are fulfilled. The ld. Sr. counsel has referred to various clauses of s.s. (2) of section 92A and submitted that the requirement of two enterprises deem to be AEs has been specified in these clauses and, therefore, these specific criteria are required to be fulfilled. In the case of the assesee, none of the enterprises hold direct or indirect share carrying not less than 26% of voting power in the other enterprise. Similarly, there is no loan, advance or any guarantee furnished by either of the enterprises to the other enterprise. Except one Director, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the orders of authorities below. 7. We have considered the rival submissions as well as relevant material placed on record. The language of section 92A(1) is unambiguous and does not leave any scope of importing any meaning of expression AE . The question raised before us is whether the meaning of expression AE as per s.s. (1) of section 92A is subjected to s.s. (2) of section 92A. The ld. Sr. counsel for the assessee has asserted that the criteria prescribed under s.s. (2) are necessarily be fulfilled for two enterprises to be treated as AEs. For ready reference, we quote the section 92A under:- 92A. Meaning of associated enterprise.- (1) For the purposes of this section and sections 92, 92B, 92C, 92D, 92E and 92F, associated enterprise , in relation to another enterprise, means an enterprise- (a) which participates, directly or indirectly, or through one or more intermediaries, in the management or control or capital of the other enterprise; or (b) in respect of which one or more persons who participate, directly or indirectly, or through one or more intermediaries, in its management or control or capital, are the same persons who participate, directly or indi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uch other enterprise; or (j) where one enterprise is controlled by an individual, the other enterprise is also controlled by such individual or his relative or jointly by such individual and relative of such individual; or (k) where one enterprise is controlled by a Hindu undivided family, the other enterprise is controlled by a member of such Hindu undivided family or by a relative of a member of such Hindu undivided family or jointly by such member and his relative; or (l) where one enterprise is a firm, association of persons or body of individuals, the other enterprise holds not less than ten per cent interest in such firm, association of persons or body of individuals; or (m) there exists between the two enterprises, any relationship of mutual interest, as may be prescribed. 8. The meaning of AEs as provided under s.s. (1) of section 92A and if the condition provided in clause (a) (b) of s.s. (1) are independently satisfied then the two enterprises for the purpose of section 92B to 92E of the Act will be treated as AEs. Sub Sec. (2) of section 92A is a deeming fiction and therefore, it expends/enlarges the scope and meaning of expression AE provided under s. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... terprises' refers to an enterprises which participates, directly or indirectly, or through one or more intermediaries, in the management or control or capital of the other enterprise . The scope of 'associated enterprises' is expanded further by section 92A(I)(b), taking into account group concerns, and it is provided that 'associated enterprises' covers an enterprise in respect of which one or more persons who participate, directly or indirectly. or through one or more intermediaries, in its management or control or capital, are the same persons who participate, directly or indirectly, or through one or more intermediaries, in the management or control or capital of the other enterprise. In effect, thus, when same persons participate, directly or indirectly or through an intermediary, in the management or control or capital of two or more enterprises, such enterprises are required to be treated as 'associated enterprise'. Interestingly even as definition of 'associated enterprises' has crucial references to 'participation in management or control or capital' at some places, the precise scope of this expression has not been defined und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he governing board for three or more enterprises. A literal interpretation to this clause will mean that if this relationship is between two enterprises, these two enterprises are required to be treated as 'associated enterprises' but when the same basis extends to more than two enterprises, these enterprises will not be associated enterprises. That is clearly an incongruous result. In our considered 'view, as all clauses of deeming fictions set out in section 92:(2) are only illustration of the manner in which this de facto control on decision making exists, It is necessary that, while interpreting these deeming fictions, we interpret the same in such a manner as to make them workable rather than redundant (ut res magis valeat quam pereat), and that the same test of effective control on decision making as are implicit In deeming fiction under section 92(A)(2) we also apply to the situations of more than two associated enterprises envisaged in section 92A(1)(b). In this light, let us analyse the situation before us. The manufacture of goods is carried out by the CBU Konkan Agro, which is controlled by the assessee inasmuch as the CBU is wholly dependent on the use of tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... age 97 of the paper book as under:- Directors Kaybee India Pvt. Ltd.[Yes/No] Kaybee Exim {te Ltd. [Yes/No] 1. Mr. Deepak Gurnami Yes - Director No 2. Mr. Govind Karunakaran Yes - Director Yes - Director 3. Mr. Suresh Chand Gupta Yes - Director No 4. Mr. Vikram Chand No Yes Director 5. Mr. Kumar Kishinchand Gajwani No Yes - Director Shareholders Kaybee India Pvt. Ltd. Kaybee Exim Pte Ltd. [%of holding No.of : % of Shares : holding 1. Mr. Govind Karunakaran 999 shares: 99.9% 0% 2. Mr. Deepak Gurnami 1 share : 0.1% 0% ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ol or capital as prescribed under clause (a) (b) of s.s. (1) of section 92A is satisfied. Hence, the assessee and Kaybee Exim Pte Limited, Singapore falls under the meaning of AEs as per the provisions of section 92A. 9. Ground No. 4 is regarding TP adjustment on account of service charges/commission received by the assessee in respect of procurement of yarn on behalf of Kaybee Exim Pte Limited, Singapore (AE). 10. During the year under consideration, the assessee has received service charges/commission from Kaybee Exim Pte Limited, Singapore (AE) qua purchase of fabrics and yarn on behalf of AE. The assessee received 2% commission towards purchase of fabric/taxtile and .75% towards purchase of yarn. The A.O. has accepted the commission @ 2% received by the assessee towards purchase of textile/fabric, however, the commission received by the assessee in respect of procurement of yarn on behalf of AE was determined by the A.O. at 2% as arm s length price. The A.O. has adopted the commission of 2% received by the assessee on purchase of textile as arm s length price of the commission received by the assesse on purchase of yarn. The assessee has objected the action of the A.O. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o an international transaction shall be determined by any of the method prescribed u/s 92C of the Act, therefore, in order to determine the arm s length price, the comparable uncontrolled price has to be considered as per the appropriate method applied in a particular case. In the case in hand, the A.O. has not determined the arm s length price by taking into consideration an uncontrolled price or uncontrolled transaction. The A.O. has adopted the price being the commission received by the assessee in respect of textile procurement from its AE for the purpose of arm s length commission for procurement of yarn, therefore, the price/transaction adopted by the A.O. is not an independent or uncontrolled price or transaction but it was a controlled transaction between related parties. Hence, the arm s length price adopted by the A.O. is not sustainable as per the provisions of the Act. Accordingly, we set aside the orders of the authorities below in respect of adopting the arm s length commission towards procurement of yarn and remit the issue to the record of the A.O. for determination of the same afresh as per law after considering the additional evidence filed by the assessee. Needle ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee has failed to prove that the assessee was under obligation to incur the said expenditure. If the assessee is making the payment on behalf of the owner, it cannot be allowed as business expenditure. The ld. D.R. has further submitted that when the facts and circumstances of the case for the year under consideration are identical to that of A.Y. 2004-05, then, as per Rule of Consistency, the assessee cannot challenge the disallowance made on this account. 18. We have considered the rival submissions as well as the relevant material placed on record. The A.O. has disallowed the claim of property tax and society charges on the ground that the lease agreement is silent on this ground. When the assessee has made the payment of property tax and society charges for the premises used for the business of the assessee, then, in the absence of any facts or material brought by the A.O. on record that the said payment was made by the assessee contrary to the terms and conditions of the agreement or on behalf of the owner of the property, then, the A.O. has proceeded only on the assumption and not on any tangible material or fact. Though the issue was decided by the Commissioner for the A.Y ..... X X X X Extracts X X X X X X X X Extracts X X X X
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