HIGH COURT OF JUDICATURE FOR RAJASTHAN BENCH AT JAIPUR D.B. Income Tax Appeal No. 600/2011 COMMISSIONER OF INCOME TAX, JAIPUR-II, JAIPUR Appellant Versus M/S JAIPUR SILVER JEWELS P. LTD., 1/202, VIDYADHAR NAGAR, JAIPUR Respondent Connected With D.B. Income Tax Appeal No. 607/2011 COMMISSIONER OF INCOME TAX, JAIPUR-II, JAIPUR Appellant Versus M/S JAIPUR SILVER JEWELS P. LTD., 1/202, VIDYADHAR NAGAR, JAIPUR Respondent For Appellant(s) : Mr. Prateek Kedawat for Mr. R.B. Mathur For Respondent(s) : Mr. Gunjan Pathak with Ms. Ishita Rawat HON'BLE MR. JUSTICE K.S.JHAVERI HON'BLE MR. JUSTICE INDERJEET SINGH Order 06/09/2017 In both these appeals common questions of law and facts are involved, hence, they are decided by this common judgment. 1. By way of both these appeals, appellant has assailed judgment and order of Tribunal whereby Tribunal has dismissed appeal of department confirming order of (2 of 8) [ ITA-600/2011] CIT(A). 2. This Court while admitting appeals framed following questions of law:- i) Whether in facts and circumstances of case, ITAT was justified in holding that M/s India Gems & Beads inc. is not associated enterprises without appreciating provisions of Section 92A(2)(m) of Act. ii) Whether in facts and in circumstances of case, ITAT was justified in holding that M /s India Gem & Beads inc is not associated enterprise without appreciating that AO has also mentioned that in this case provisions of section 92A (2) (m) are also involved & accordingly assessee and M/s India Gem & Beads Inc was having mutual interest and therefore was associatedc enterprise. No comment has been made by Tribunal on this aspect. 3. Counsel for appellant has taken us to order passed by CIT(A) wherein it has been observed as under:- 1. Whether assessing officer was justified in enhancing total income of appellant on account of transfer pricing adjustment. 1.1. On perusal of relevant portion of assessment order it is noticed that on basis of last year s finding given in assessment order dated 27.12.2006 A.O has come to conclusion that M/s India Gems and Beads INC USA falls within meaning of Associated Enterprises as per S.92A of I.T. Act and following CUP method as most appropriate method to ascertain arm s length price of semi precious stones studded in silver jewellery and sold aforesaid associated concern and on this account worked out transfer pricing adjustment of Rs. 75,66,093/-. 1.2. Challenging said view of assessing officer Sh. G.G. Mundra CA & AR of appellant by referring provisions of S.92A has argued that there is no material or evidence on record that said India Gems and Beads is associated enterprises of appellant company. In this respect, reliance has been placed upon (3 of 8) [ ITA-600/2011] CIT(A) s order folr A.Y. 2004-05 dated 3.10.2007. He had further argued that A.O failed to appreciate distinct nature of transactions of appellant while arriving at arm s length price based on CUP method which could not have been applied in present facts of case because no piece of gem and stone even of same category can be exactly comparable to other because of various varieties, colour, lusture, size, cutting and other features therefore, CUP method cannot be applied and even if some method has to be applied then it has to be TNMM. 4. He further contended that CIT(A) and Tribunal both have wrongly interpreted provisions of S.92A of Income Tax Act and same requires consideration. For purpose of Section 92A(2)(i), (j), (m) & (f) associated enterprises means other then established associated enterprise. However, while considering same counsel for respondent has pointed out that Tribunal and CIT(A) in para 1.3 has rightly considered statutory rules which are applicable and followed same. Tribunal while considering same held as under:- 7. On basis of aforesaid reason, AO drawn conclusion that there exists relationship between assessee and M/s. India Gems & Beads of mutual interest specified under section 92A(2)(m). Thereafter, in order to ascertain ALP of international transactions, assessee company ws asked to work out cost of material sold to said associated concern vis-a-vis otherr concern. AO further observed that assessee failed to explain ALP method instead of allowing more than adequate opportunity. Thereafter, AO has given finding that sale price of same goods to unconnected parties is available. Therefore, most suitable method of determining ALP is Comparable Uncontrolled Price Method as given in section 92C(1)(a). Finally while determining ALP as per CUP (4 of 8) [ ITA-600/2011] method, he observed that average sale price of silver portion in jewellery is same as in case of M/s. India Gems & Beads. USA and in cases of other concerns. However, in case of stones, studded in said jewellery. When it was sold to oter concern, average sale price was shown at Rs.40/- per gram while in case of India Gems & Beads it was shown at Rs.8.10 per gram. On this basis, AO worked out such price of studded stone at Rs.2,10,42,416/- instead of Rs.42,57,078/- shown by assessee. Accordingly, AO worked out addition on this account for balance amount at Rs.1,67,85,338/-. Detailed written submissions were filed before ld. CIT(A). It was submitted that adjustment made by AO is beyond provisions of section 4 read with section 2(24) of Act. It was submitted that M/s. India Gems & Beads. USA is not associated enterprise of assessee within meaning of section 92A(2)(i)(j)(m) of Act. No conditions are satisfied as specified in section 92A between assessee and M/s. India Gems & Beads, USA for treating transaction for purpose of ALP. None of two tests specified in section 92A are satisfied. No evidence has been put on record by AO to hold that sale price is influenced by M/s. India Gems & Beads. It was further submitted that in order to consider it as associated concern, if one enterprise is controlled by individual and other enterprise is also controlled by said individual or his relative, then only said relationship exists. But in present case neither such relationship exists nor such control exists. It was also submitted that none of conditions specified under section (3) of Section 92C were satisfied in present case. It was explained that in fact price per gram of silver realized from M/s. India Gems & Beads was better than from export to other parties. CUP method is not applicable in facts of present case. only available method, if provisions are applicable is TNM method, according to which operating net profit margin shown by assessee was 11.69% as against such margin of uncontrolled enterprise in India having similar functional activities where such margin was 6.17%. explanation offered on behalf of assessee was sent to AO along with full paper book for this report. In remand report it was (5 of 8) [ ITA-600/2011] submitted that Smt. Anupama Singh who is sole shareholder of M/s. India Gems & Beads happens to be sister-in-law (brother's wife) of Shri Vinay Pratap Singh who is director of company Accordingly, it makes crystal clear that condition as enumerated in section 92A(2)(j) is satisfied in assessee's case. It was further submitted that above conclusion takes more strength by fact that premise from where M/s. India Gems & Beads Inc., USA is owned by Shri Dharam Pal Singh who is brother of Shri Vinay Pratap Singh. Moreover, Shri Vinay Pratap Singh or M/s. India Gems & Beads Inc. Does not pay anything for occupying/using said premise. Apparently M/s. India Gems & Beads Inc. Is sister concern of M/s. Jaipur Silver Jewels Pvt. Ltd. And undoubtedly falls within meaning of associated concern as per section 92A of Act. Thereafter another letter was issued to AO to submit specific report that on what basis finding has been given that M/s. India Gems & Beads Inc., USA is covered within meaning of Associated Enterprises as referred in section 92A of Act. He was also requested to explain how ALP was ascertained without making any reference to TPO which could have been made as per CBDT's instructions, if transactions with Associated Enterprise were exceeding Rs.5 Crores. In this respect it was clarified that transaction was below Rs. 5 crores and, therefore, no reference was made to TPO. reply received from AO was sent to assessee for its comments and comments were received from assessee's side, which are mentioned at pages 8 & 9 of ld. CIT (A)'s order. 8. After considering reply and comments of AO, ld. CIT(A) found that transactions entered between assessee and M/s. India Gems & Beads Inc., USA are not covered under section 92A for purpose of applying ALP. Accordingly, he deleted entire addition made by AO. 9. ld. D/R who appeared before Tribunal filed detailed written submissions. Reliance has been placed on various case laws, copies of which are filed along with written submissions. written submissions were explained also. It was explained that Smt. (6 of 8) [ ITA-600/2011] Anupama Singh who is sole shareholder of M/s. India Gems & Beads Inc. Is wife of brother of Director of Company. company is controlled by father-in-law of Smt. Anupama Singh, brother-in-law shri Vinay Pratap Singh and, therefore, they are relatives and accordingly AO was correct in holding M/s. India Gems & Beads Inc. As associated enterprise of assessee company. Detailed written submissions were explained by ld. D/R. 10. On other hand, ld. Counsel of assessee firstly placed reliance on order of ld. CIT(A). Further attention of Bench was drawn on provisions of section 2(41) where definition of relative is prescribed. definition of relative provided under section 2(41) was read also. Accordingly it was submitted that there is no relationship between Director of assessee company with Smt. Anupama Singh, proprietor of M/s. India Gems & Beads Inc. Therefore, order of ld. CIT(A) does not suffer from any infirmity. It was explained that TNM method is correctly applied by ld. CIT(A) as CUP method is not applicable on facts of case. It was explained that provisions of section 92A(2)(i)(j)(m) & (f) are not applicable and accordingly order of ld. CIT(A) is liable to be sustaineed. 11. ld. D/R in reply asked one day's time to rebut contention of ld. A/R. However, case was taken as heard and ld. D/R was allowed to file reply if he likes upto 29 th November,2010. However, no reply has been filed on behalf of department. Therefore, this ground is disposed off after taking into consideration arguments advanced on date of hearing i.e. on 26.11.2010. 12. After taking into considerationthe submissions of both sides, we find that ld. CIT(A) was justified in holding that transactions entered into between assessee and M/s. India Gems & Beads Inc. Are not international transaction for purpose of adjustment under ALP. AO heavily placed reliance on provisions of section 92A(2)(j) which reads as under:- "Where one enterprise is controlled by individual, other enterprise is also controlled by such individual or his relative or jointly by such individual and relative of such individual." (7 of 8) [ ITA-600/2011] definition of individual is provided under section 2(41) of Act which reads as under:- "Relative in relation to individual, means husband, wife, brother or sister or any lineal ascendant or descendant of that individual." After going through relevant provisions of section 92 for purpose of adjustment under ALP and after going through definition provided under section 2(41), it is abudantly clear that Smt. Anupama Singh is not relative of Director of assessee company for purpose f adjustment under ALP. AO has stated that premises at USA is used by Smt. Anupama Singh and Shri Vinay Pratap Singh jointly without paying any rent. There is no bar to use premises owned by third person jointly or severally. However, what is requirement of law for attracting international transaction for purpose of ALP is that person should be relative for purpose of ascertaining associated concern as proviede under section 2(41). Provisions of section 2(41) by which definition of relative provided are very clear. Therefore, there is no question of holding transaction between assessee company and India Gem & Beads Inc., USA as associated concern as proveded under section 92A(2)(j). 13. We have also seen other provisions of section 92 and found that they are also not applicable on facts of present case. Therefore, we hold that ld. CIT (A) was justified in holding that assessee company is not covered under section 92A(2)(j) of Act within meaning of associated enterprise. We further noted that without prejudice to above finding, finding of ld. CIT(A) that AO has not applied various method to work out ALP as per various methods specified under section 92C of Act read with relevant rules and OECD guide lines whatsoever. In present facts of case even if some method was to be applied it could have been TNM method specified under section 92(1)(c) of Act. AO has not made any exercise of ascertaining operating net profit margin of uncontrolled enterprises who are other related companies in India having similar functional activities which have been shown in appellate proceedings at 6.17% as against operating net profit margin of assessee at 11.69%. These findings of ld. (8 of 8) [ ITA-600/2011] CIT(A) remained uncontroverted as nothing concrete have been brought on record either by AO or by ld. D/R during appellate proceedings. Therefore, in view of above facts and circumstances and in view of reasoning given by ld. CIT(A), we confirm finding lf ld. CIT(A) in this respect. 5. We have heard counsel for both sides. 6. Taking into consideration that sister in law is not associated nor relative under Income Tax Act, in that view of matter, provision of Section 92A (2)(m) is wrongly interpreted by AO, whereas Tribunal and CIT(A) have rightly interpreted same. 7. In that view of matter, since both issues are inter- connected therefore, both issues are answered in favour of assessee against department. 8. appeals stand dismissed. (INDERJEET SINGH)J. (K.S.JHAVERI)J. A.Sharma/91-92 Commissioner of Income-tax, Jaipur-II, Jaipur v. Jaipur Silver Jewels P. Ltd