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TMI Blog2021 (2) TMI 454X X X X Extracts X X X X X X X X Extracts X X X X ..... as under: "2. That on law, facts and circumstances of the case, the Worthy CIT(A) has erred in confirming the action of Ld. A.O. in making addition of Rs. 82,89,576/- u/s. 40A(2)(b) of the Act in respect of purchases of Rs. 3,38,35,000/- made from a related party even when the purchases were made at reasonable rates under circumstances and complete explanation for the same was filed." 3. The brief facts relating to the issue are that the assessee company is engaged in the business of manufacturing of security equipment. During assessment proceedings the Assessing Officer (AO) noted that the Gross Profit (GP) ratio shown by the assessee in the impugned year was lower as compared to the last year and according to the AO the same was on account of purchases made from the sister concern of the assessee, M/s. Future Technology, at unreasonable rates. The AO accordingly confronted the same to the assessee in response to which detailed submissions were filed by the assessee justifying both the fall in GP and the reasonableness of the rates at which the purchases were made from the sister concern. The AO was not satisfied with the same and held that the assessee had purchased items at v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he GP earned by the assessee during the year, in the impugned transaction, i.e. less than the normal margin, thus justifying the reasonableness of the price at which the transaction was undertaken. The relevant submissions in this regard are as under: "13.1 Per Contra: In response to the appeal filed by the appellant u/s. 250 of the Act, authorized representative (in short "Ld. AR") filed written submission on behalf of the assessee as under:- "1. The appellant is a company & is engaged in manufacturing of security equipments. 2. The appellant procures order for supply of engineering goods. 3. The only question involved in present appeal is pricing arrangement of goods purchased by appellant from M/s. Future Technologies (Sister Concern). Sh. R.K. Gupta is the director of appellant company & his son Sh. Amit Gupta is proprietor of M/s. Future Technologies. 4. M/s. Future Technologies is a manufacturing concern whose profit is deductible u/s. 80IC of the Act since its unit is in Himachal Pradesh. Its assessment for the year in question was also completed u/s. 143(3) by the same Assessing Officer at or around almost the same time by passing order u/s. 143(3). Qua the issue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t extract of this sec. is under "Where the assessee incurs any expenditure in respect of which payment has been or is to be made to any person referred to in clause (b) of this sub-section, and the Assessing Officer is of opinion that such expenditure is excessive or unreasonable having regard to the fair market value of the goods, services or facilities for which the payment is made or the legitimate needs of the business or profession of the assessee or the benefit derived by or accruing to him there from, so much of the expenditure as is so considered by him to be excessive or unreasonable shall not be allowed as a deduction " It is evident that disallowance u/s. 40A(2)(a) cannot be made unless the expense is excessive or unreasonable having regard to: a) FMV of goods; b) Legitimate needs of business of assessee; and c) Benefit derived by or accruing to assessee. 12. Comparing the facts of present case and the relevant provision of sec. 40A(2)(a), the impugned addition deserves to be deleted due to following counts:- 1) The total gross margin from order of Ministry of Defence was 30%. out of which 24% was earned by M/s. Future technologies & rest by appellant compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ld. AO was highly unjustified in making impugned addition of Rs. 82,89,576/- u/s. 40 (A)(2)(a) of the Act. 4) In support of our factual arguments, we also relying upon ratio of following judgments: [NO SUCH JUDGEMENTS ARE FOUND DETAILED BY THE AR IN THIS PARA] In the light of above facts, circumstances and legal position of the case, it is prayed that this ground of the appellant may please be allowed. We shall be highly obliged." 4.1. Per contra the Ld. DR relied heavily on the findings of the Ld. CIT(A) at para 13.2 of the order as under: 13.2 HELD: I have perused the order of the Assessing Officer and examined the reply of the assessee. It is an undisputed fact that the appellant is a company & is engaged in manufacturing of security equipments. It is claimed that the appellant procures order for supply of engineering goods. The moot question in this appeal is low GP Rate as compared to the last year and pricing arrangement of goods purchased by appellant from M/s. Future Technologies (Sister Concern). Sh. R.K. Gupta is the director of appellant company & his son Sh. Amit Gupta is proprietor of M/s. Future Technologies. M/s. Future Technologies is a manufacturing concer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company completely lacked in all such facilities & resources, is also not acceptable in the absence of supporting evidence brought on record. To further argue that the total gross margin from order of Ministry of Defence was 30%, out of which 24% was earned by M/s. Future technologies & rest by appellant company is also not acceptable as it is observed that the appellant company as claimed has only acted as a trader wherein it only procured the order & supplied the goods to customer. The appellant has failed to submit any agreement/MOU with sister concern on arbitrarily sharing of profits out of 30% gross margin. It is strange that the appellant company is loudly arguing that it has got order form Ministry of Defence for supply of relevant items, but did not have relevant experience, resources & manufacturing facilities to supply product in short span of time of less than 2 months. Meaning thereby that the appellant company is procuring orders from the Ministry of Defence by misrepresenting the true facts when it has no capability in the form of relevant experience, resources & manufacturing facilities to supply product in short span. There is no such agreement or MOU produced in a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rable strength in the justification given by the Ld. Counsel for the assessee for the reasonableness of the price of the related party transaction which rests on the premise that the value of the transaction in the hands of the related party was at consistently returned gross profit from year to year which stood accepted by the department also. All the factual contentions of the Ld. Counsel for the assessee with regard to the same have remained unrebutted before us. In view of the same the sale price of the impugned transaction in the hands of the related party is undoubtedly established to be at fair market value and consequently so the purchases in the hands of the assessee. The assessee we find has sufficiently established the reasonableness of the purchases made from sister concern. On the other hand the reasoning of the Ld. CIT(A) holding the purchases to be inflated, we find, is based on surrounding circumstances and there is no direct evidence establishing the unreasonableness of the purchases. The entire case of the Revenue is that the assessee was unable to justify fall in gross profits during the year and that its explanation of having procured an order from the governmen ..... X X X X Extracts X X X X X X X X Extracts X X X X
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