9911796707
TMI Blog2021 (2) TMI 454X X X X Extracts X X X X X X X X Extracts X X X X ..... a small portion, was all unsubstantiated and make believe. The department itself having accepted the price/value of the impugned transaction in the hands of the related party in scrutiny assessment and nothing having been brought before us demonstrating any corrective action being initiated by the department against it in view of the impugned transaction being found to be at inflated prices, we find no force in the argument of the Revenue. Transaction of purchases made by the assessee with its related party stands established to be at fair market value and the addition u/s. 40A(2)(b) - Decided in favour of assessee. - ITA No. 487/Chd/2019 - - - Dated:- 22-1-2021 - Sanjay Garg , Member ( J ) And Annapurna Gupta , Member ( A ) For the Appellant : Parikshit Aggarwal , C. A. For the Respondents : Arvind Sudarshan , JCIT ORDER Per Annapurna Gupta, Member , Accountant Member The present appeal has been filed by the assessee against the order passed by the Ld. Commissioner of Income Tax (Appeals)-1, Chandigarh(hereinafter referred to as CIT(A)] u/s. 143(3) of the Income Tax Act, 1961(in short referred to as Act ) dt. 05/03/2019 relating to assessment yea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hands of the assessee as per section 40A(2)(b) of the Act and addition made of the same to the income of the assessee. This addition was vehemently agitated before the Ld. C(A) who was not convinced with the arguments of the assessee and therefore he upheld the order of the AO, dismissing the appeal of the assessee. 4. Before us, Ld. Counsel for the Assessee referred to the detailed submissions made before the Ld. C(A) reproduced at para 13.1 of his order and justified the purchases made from the sister concern stating as under: 1. That the GP earned by the sister concern during the impugned year was consistent with that earned in the preceding years and had further been accepted under regular assessment framed under 143 (3) of the Act. Therefore clearly the sales made by the sister concern to the assessee was at arms length/FMV. Our Attention was drawn to the Gross margin earned by the SC M/s. M/s. Future Technology in the impugned year and the preceding year reproduced at page 13 of CIT(A) order as under: M/s. Future technologies has history experience of manufacturing supply of security equipments to ministry of Defence. Its established accepted GP rate in last 3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n security equipments. M/s. Future technologies had the experience, manufacturing facilities, resources capability to execute the order within specified limited time. The appellant company completely lacked in all such facilities resources. Therefore, it outsourced the manufacturing part of the order to M/s. Future technologies at agreed price between the parties. A tabulation showing price charged from Ministry of Defence, price paid to M/s. future technologies, Margin retained by the assessee, cost of the relevant products of future technologies gross margin earned by M/s. future technologies is enclosed. 7. It is an undisputed fact that the appellant purchased goods worth ₹ 338.35 Lacs from M/s. Future technologies sold them to Ministry of Defence at ₹ 357.80 Lacs earning margin of approximately 5.50%. Except form procuring order getting products manufactured from future technologies, appellant company did not do any value addition to the product did not incur any expense for supply of this product. In respect of this order, M/s. future technologies earned gross margin of approximately 24%. 8. All the above facts are totally undisputed. 9. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arged margin of approximately 24% from the appellant company. Therefore, when the appellant only acted as a trader related party used its infrastructure to manufacture the product charged a margin which was less than what it was charging from unrelated customers, it is nothing but a case of purchase of goods from related party at even lessor then its Fair Market value of goods. Therefore, no disallowance u/s. 40A(2)(a) should have been made. 2) The appellant company 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. As against this, M/s. Future technologies had all such experience, resources, capability capacity to manufacture such products execute such high volume of order in such short span of time. Considering all such facts, the pricing arrangement between the parties was more than reasonable as it was the legitimate need of business of the assessee which is one of the situation covered in sec. 40(A)(2)(a) also. Therefore, addition u/s. 40(A)(2)(a) should not have been made. 3) The appellant applied for petti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... creased whereas on perusal of details of party wise purchases, the AO has found that the assessee had opening balance of raw material amounting to ₹ 99,10,455/-, which was purchased in the earlier years and used this year. In response of the assessee that the company had manufactured different products every year as per the requirements of the customers it is observed that the assessee has utilized same raw material during the year as well as in the previous year. Hence, the claim of the assessee that the products are totally different in two years is outrightly incorrect. Since, assessee is itself manufacturer of security equipments, it is strange that assessee is reporting low GP as compared to the sister concern M/s. Future Technology. The assessee itself stated during assessment proceedings that though the company had manufactured different items but consistently maintained almost same G.P. To claim that assessee purchased items from M/s. Future Technology on credit basis and this was one of the reasons for charging of higher rate from related party M/s. Lotus Machines (P) Ltd. is not acceptable when AO has observed that the assessee in routine business has purchased item ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... held that by entering into this transaction with it's related party and by inflating its purchases, the assessee has made an arrangement by way of which its GP rate has come down by 8.39% in AY 2013-14 as compared to the earlier year and the assessee has been able to show very high rate of G.P in related party M/s. Future Technology. Hence, it is clear that the assessee had made purchases from the related party at unreasonable price as the assessee had made purchases of ₹ 3,38,35,000/- from M/s. Future Technology which is a related party. By this arrangement, M/s. Future Technology had earned 40% G.P during the assessment year 2013-14 and accordingly the related party earned unreasonable profit from M/s. Lotus Machines Pvt. Ltd. of ₹ 96,67,142/- @ 40% leaving profit for the assessee about @ 6% only. It is a fact that M/s. Future Technology is the unit claiming deduction u/s. 80IC of the Act and high profit suits the sister concern. There seems a tacit arrangement between both the parties. The AO has rightly disallowed the sum of ₹ 82,89,576/- under the provisions of section 40A(2)(a) of the Act. The Ground of Appeal No. 2 is dismissed. 4.2. Referring to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee had so managed and arranged its affairs that it siphoned off larger share of the profits to its related concern which was a tax exempt unit retaining only a small portion of the profits. To put it succinctly failure to explain satisfactorily fall in G.P is the main plank for holding the transaction of purchase of the assessee with the related party as being inflated and not at fair value. The department itself having accepted the price/value of the impugned transaction in the hands of the related party in scrutiny assessment and nothing having been brought before us demonstrating any corrective action being initiated by the department against it in view of the impugned transaction being found to be at inflated prices, we find no force in the argument of the Revenue. 6. In view of the above, we hold that the transaction of purchases made by the assessee with its related party stands established to be at fair market value and the addition made of ₹ 82,89,576/- u/s. 40A(2)(b) of the Act, is therefore deleted. 7. Ground of appeal raised by the assessee is allowed. 8. In effect appeal of the assessee is allowed. Order pronounced on 22/01/2021. - - TaxTMI - TMI ..... X X X X Extracts X X X X X X X X Extracts X X X X
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