DCIT 24(3), MUMBAI v. CELLO STATIONERY PRODUCTS, MUMBAI

ITA 5866/MUM/2008 | 2005-2006
Pronouncement Date: 23-02-2010 | Result: Dismissed

Appeal Details

RSA Number 586619914 RSA 2008
Assessee PAN AADFC8145P
Bench Mumbai
Appeal Number ITA 5866/MUM/2008
Duration Of Justice 1 year(s) 5 month(s)
Appellant DCIT 24(3), MUMBAI
Respondent CELLO STATIONERY PRODUCTS, MUMBAI
Appeal Type Income Tax Appeal
Pronouncement Date 23-02-2010
Appeal Filed By Department
Order Result Dismissed
Bench Allotted C
Tribunal Order Date 23-02-2010
Date Of Final Hearing 10-02-2010
Next Hearing Date 10-02-2010
Assessment Year 2005-2006
Appeal Filed On 23-09-2008
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES C MUMBAI BEFORE SHRI R V EASWAR SENIOR VICE PRESIDENT AND SHRI T R SOOD ACCOUNTANT MEMBER I T A NO: 5866/MUM/2008 (ASSESSMENT YEAR: 2005-06) DEPUTY COMMISSIONER OF INCOME TAX 24(3) MUMBAI A PPELLANT VS M/S CELLO STATIONERY PRODUCTS MUMBAI RESPONDEN T (PAN: AADFC8145P) APPELLANT BY: SHRI YESHWANT U CHAVAN RESPONDENT BY: SHRI NITESH JOSHI & SHRI DHIREN K RA THORE O R D E R R V EASWAR SENIOR VICE PRESIDENT: THIS APPEAL BY THE DEPARTMENT RELATES TO THE ASSES SMENT YEAR 2005-06 AND ARISES OUT OF THE ASSESSMENT ORDER FRAM ED ON THE ASSESSEE UNDER SECTION 143(3) OF THE INCOME TAX ACT 1961 ON 05.11.2007. 2. THOUGH THERE ARE AS MANY AS 8 GROUNDS OF APPEAL THE ISSUE IS ONE AND THE SAME NAMELY WHETHER THE ASSESSEE WAS RIGHTLY ALLOWED THE DEDUCTION UNDER SECTION 80-IB AS CLAIMED BY IT. 3. THE BRIEF FACTS RELATING TO THE APPEAL ARE THESE . THE ASSESSEE IS A PARTNERSHIP FIRM. THERE ARE FOUR PARTNERS AND TH EY ARE PRADEEP G RATHOD (HUF) HOLDING 25% PANKAJ G RATHOD (HUF) HOL DING 25% GAURAV P RATHOD HOLDING 45% AND RAJIV S AGARWAL HOL DING 5%. THE FIRM IS ENGAGED IN THE MANUFACTURE OF PENS AND WRIT ING MATERIALS AND 2 WAS FORMED IN MARCH 2004. IN THE RETURN FILED FOR THE YEAR UNDER APPEAL THE ASSESSEE CLAIMED DEDUCTION OF RS.8 41 8 0 626/- UNDER SECTION 80-IB. WHILE SCRUTINIZING THE RETURN THE ASSESSING OFFICER NOTICED THAT THERE WAS ANOTHER PARTNERSHIP FIRM BY NAME M/S CELLO SALES AND MARKETING (HEREINAFTER REFERRED TO EITHER AS CSM OR MARKETING ARM). THIS PARTNERSHIP FIRM HAD BEEN EST ABLISHED ON 01.04.2001 TO MARKET THE PRODUCTS MANUFACTURED BY T HE CELLO GROUP OF CONCERNS WHICH WERE IN EXISTENCE AT THAT TIME NAME LY M/S CELLO PENS AND STATIONERY PRIVATE LIMITED M/S CELLO PLASTIC P RODUCTS AND M/S CELLO WRITING INSTRUMENTS PRIVATE LIMITED. ALL THE SE THREE CONCERNS WERE FOUND TO HAVE BEEN ENJOYING DEDUCTION UNDER SE CTION 80-IA. THE ASSESSEE HAD ALSO ARRANGED THAT ITS PRODUCTS WOULD BE MARKETED THROUGH CSM. IN OTHER WORDS CSM WHICH WAS THE MAR KETING ARM OF THE OTHER THREE CONCERNS OF THE CELLO GROUP WAS ALS O APPOINTED AS THE MARKETING ARM OF THE ASSESSEE AFTER THE ASSESSEE W AS CREATED. THE ASSESSING OFFICER NOTICED THAT CSM WAS ALSO CONTROL LED BY MEMBERS OF THE CELLO GROUP. HE ACCORDINGLY INVOKED THE PROVIS IONS OF SECTION 80- IA(10) WHICH WAS MADE APPLICABLE TO SECTION 80-IB BY SUB-SECTION (13) OF SECTION 80-IB. SECTION 80-IA(10) EMPOWERED THE ASSESSING OFFICER TO REGULATE THE DEDUCTION CLAIMED BY AN ASSESSEE UN DER SECTION 80-IB IF HE FINDS THAT OWING TO THE CLOSE CONNECTION BETW EEN THE ASSESSEE AND ANY OTHER PERSON THE COURSE OF BUSINESS BETWEEN THEM IS SO ARRANGED THAT IT PRODUCES TO THE ASSESSEE MORE THAN THE ORDINARY PROFITS WHICH MIGHT BE EXPECTED TO ARISE IN THE BUS INESS. IN SUCH A CASE THE ASSESSING OFFICER WAS AUTHORIZED TO TAKE T HE AMOUNT OF 3 PROFITS AS MAY BE REASONABLY DEEMED TO HAVE BEEN DE RIVED FROM THE ELIGIBLE BUSINESS AS THE PROFITS ELIGIBLE FOR THE D EDUCTION. IN OTHER WORDS THE SUB-SECTION WAS AIMED AT PREVENTING THE SHIELDING OF PROFITS OF OTHER ENTITIES TO THE ASSESSEE SO THAT EXEMPTION CAN BE CLAIMED IN RESPECT OF SUCH PROFITS UNDER SECTION 80-IB. THE A SSESSING OFFICER CONCLUDED THAT THE MARKETING ARM WAS CREATED AS A D EVISE TO SHIFT THE LEGITIMATE EXPENSES OF THE ASSESSEE FIRM TO THE MAR KETING ARM SO AS TO SHOW HIGHER PROFITS IN THE HANDS OF THE ASSESSEE FIRM WHICH COULD BE CLAIMED AS DEDUCTION UNDER SECTION 80-IB. HE NO TICED THAT CSM WAS FULLY TAXABLE AND THE ASSESSEE HAD SHIFTED ALL ITS EXPENSES TO CSM WITH THE DELIBERATE INTENTION TO REDUCE THE NET PRO FIT OF CSM TO THE BAREST MINIMUM LEVEL AND SHIFT THOSE PROFITS TO THE ASSESSEE ITSELF SO THAT THEY CAN BE CLAIMED AS DEDUCTION UNDER SECTION 80-IB. HE NOTICED THAT THE ASSESSEE HAD SHOWN 55.67% OF NET PROFIT WH EREAS CSM HAS SHOWN ONLY 0.17% AS NET PROFIT. AT PAGE 3 OF THE A SSESSMENT ORDER HE MADE OUT A TABLE LISTING OUT EXPENSES UNDER VARI OUS HEADS CLAIMED BOTH BY THE ASSESSEE AS WELL AS CSM ACCORDING TO W HICH THE ASSESSEE HAD CLAIMED ONLY RS.62 298/- AS EXPENSES W HEREAS CSM HAD CLAIMED RS.21 69 40 709/- AS EXPENSES. ACCORDI NG TO THE ASSESSING OFFICER FROM THE FACTS IT WAS ABUNDANTLY CLEAR THAT THE CONDITIONS OF SUB-SECTION (10) OF SECTION 80-IA REA D WITH SUB-SECTION (13) OF SECTION 80-IB WERE SATISFIED AND HE THEREF ORE PROCEEDED TO RECOMPUTED THE PROFITS OF THE ASSESSEE FIRM. 4. THE ASSESSING OFFICER NOTED THAT THE NET PROFIT FIGURES OF COMPANIES SUCH AS HLL GODREJ AND DABUR WHICH ARE A LL 4 MANUFACTURING CONCERNS VARIED BETWEEN 10% TO 15% O NLY IN STARK CONTRAST TO THE NET PROFIT OF 55.67% SHOWN BY THE A SSESSEE. HE ALSO COMPARED THE FIGURE OF A COMPANY BY NAME M/S TODAYS WRITING PRODUCTS LIMITED WHICH WAS DEALING IN THE SAME LIN E OF BUSINESS (WRITING INSTRUMENTS AND STATIONERY ITEMS) AND SITU ATED AT DADRA NAGAR HAVELI IN THE NEIGHBOURHOOD OF DAMAN. THAT COMPAN Y SHOWED NET PROFIT RANGING BETWEEN 7% TO 12%. HE ALSO NOTED TH AT CSM WAS CLAIMING ALMOST 98.24% AS EXPENSES ON SALES MARKET ING AND ADMINISTRATIVE HEADS OUT OF ITS TOTAL EXPENSES WHIC H WAS QUITE HIGH FOR A MARKETING COMPANY; WHEREAS THE ASSESSEE WHICH WAS THE MANUFACTURING COMPANY DID NOT INCUR ANY EXPENSES EX CEPT TRAVELLING AND CONVEYANCE EXPENSES OF RS.62 298/-. THE ASSESS ING OFFICER ALSO COMPARED THE NET PROFIT EARNED BY M/S GAUTAM INDUST RIES (PROPRIETOR: MS SEEMA PRABHUDESAI) WITH THAT OF THE ASSESSEE AND FOUND THAT THE FORMER EARNED A NET PROFIT OF ONLY 6.63% AFTER DEBI TING ALL THE ADMINISTRATIVE AND MARKETING EXPENSES IN ITS PROFIT AND LOSS ACCOUNT. AFTER NARRATING THESE FACTS AND COMPARING THE ASSES SEES CASE WITH THE CASES MENTIONED ABOVE THE ASSESSING OFFICER ESTIMA TED THE ASSESSEES NET PROFIT AT 27.92% BY TAKING THE AVERA GE OF THE NET PROFIT OF 55.67% EARNED BY THE ASSESSEE FIRM AND 0.17% EAR NED BY CSM. THE AGGREGATE CAME TO 55.84% WHICH DIVIDED BY 2 GA VE THE AVERAGE OF 27.92%. SINCE THE TOTAL SALES OF THE ASSESSEE F OR THE YEAR AMOUNTED TO RS.15 12 05 778/- ON WHICH NET PROFIT OF 55.67% CAME TO RS.8 41 84 226/- THE TURNOVER ITSELF WAS BIFURCATE D BETWEEN 27.92% AND 27.75% AND THIS GAVE THE BIFURCATED FIGURES OF NET PROFIT OF 5 RS.4 22 16 653/- AND RS.4 19 67 573/- RESPECTIVELY. CONSEQUENTLY THE BALANCE NET PROFIT I.E. 55.67% MINUS 27.92% = 27.7 5% OF NET PROFIT WAS TAKEN AS MORE THAN THE ORDINARY PROFITS. IN OT HER WORDS THE DEDUCTION UNDER SECTION 80-IB WAS RESTRICTED TO RS. 4 22 16 653/- (27.92% NET PROFIT ON THE BIFURCATED SALES) AND THE BALANCE OF RS.4 19 67 573/- WAS DISALLOWED. 5. THE ASSESSEE FILED AN APPEAL TO THE CIT(A) AND A DDUCED CERTAIN ADDITIONAL EVIDENCE WHICH WAS SENT BY THE CIT(A) T O THE ASSESSING OFFICER FOR EXAMINATION AND REPORT. ON RECEIPT OF THE REMAND REPORT OF THE ASSESSING OFFICER THE SAME WAS FORWARDED TO TH E ASSESSEE FOR MAKING SUBMISSIONS THEREON. AFTER CONSIDERING THE ASSESSEES SUBMISSIONS AND THE REMAND REPORT THE CIT(A) CONCL UDED THAT THE ADDITIONAL EVIDENCE REPRESENTED BASIC DOCUMENTS AND WERE USEFUL FOR DECIDING THE APPEAL PROPERLY. HE ALSO HELD THAT TH E ASSESSEE WAS NOT GIVEN ANY OPPORTUNITY TO ADDUCE THE EVIDENCE BEFORE THE ASSESSING OFFICER. HE ACCORDINGLY ADMITTED THE ADDITIONAL EV IDENCE AND PROCEEDED TO DISPOSE OF THE APPEAL. AFTER CONSIDER ING THE FACTS AND THE SUBMISSIONS HE RECORDED THE FOLLOWING FINDINGS : - (A) THE ASSESSEE SOLD ITS PRODUCTS TO CSM AT A DISC OUNT OF 25% FROM THE DEALER PRICE. THE MARKETING ARM PASSE D ON A PART OF THE DISCOUNT TO THE STOCKIEST AND ALSO INCURRED SELLING MARKETING AND ADMINISTRATIVE EXPE NSES; THE MAJOR EXPENSES BEING SALES PROMOTION AND ADVERTISEMENT. 6 (B) THE MARKETING EXPENDITURE INCURRED BY CSM WHIC H WAS ACTING AS THE MARKETING ARM OF ALL THE CELLO GROUP CONCERNS COVERED THE PRODUCTS OF ALL THE GROUP CON CERNS. HAD CELLO GROUP NOT FLOATED THE COMMON MARKETING AR M EACH COMPANY IN THE GROUP WOULD HAVE SPENT SUCH EXPENSES SEPARATELY WHICH WOULD HAVE BEEN WASTEFUL . THE CELLO GROUP WAS ACTING PRUDENTLY BY DOING THE PROMOTION AND ADVERTISEMENT OF THE SAME PRODUCTS FR OM A SINGLE WINDOW. (C) SELLING THE SAME PRODUCTS FROM A SINGLE WINDOW WOULD HAVE DEFINITELY BENEFITED THE CELLO GROUP AS THEIR STOCKIEST WERE SITUATED AT DIFFERENT PLACES IN THE COUNTRY AND A SINGLE WINDOW MARKETING WOULD HAVE HANDLED TH E ATTENDANT PROBLEMS MUCH MORE EFFICIENTLY. (D) FOR THE ABOVE REASONS THE ASSESSEE IS RIGHT IN SAYING THAT CSM WAS FLOATED FOR EFFICIENT AND COORDINATED MARKETING OF SIMILAR PRODUCTS MANUFACTURED BY SEVER AL CONCERNS OF THE CELLO GROUP. (E) IT IS NECESSARY TO COMPARE THE FINANCIAL RESULT S OF THE ASSESSEE WITH OTHER CASES ON THE ASSUMPTION THAT NO MARKETING ARM HAD BEEN FLOATED. IF NO MARKETING AR M HAD BEEN FLOATED THE ASSESSEE AND THE OTHER MANUFACTURING CONCERNS OF THE GROUP WOULD HAVE SOLD THEIR PRODUCTS DIRECTLY TO THE STOCKIEST AT A PRICE AT WHICH THE MARKETING ARM ACTUALLY SOLD THE GOODS TO THEM A ND 7 WOULD HAVE ALSO INCURRED ALL THE EXPENSES WHICH THE MARKETING ARM ACTUALLY INCURRED. THE RESULT WOULD BE THAT THE PROFIT OF THE MANUFACTURING CONCERNS WOULD HAVE BEEN HIGHER BY THE AMOUNT OF PROFIT ACTUALLY EARNED BY T HE MARKETING ARM. (F) THUS ALL THE MANUFACTURING CONCERNS OF THE GRO UP INCLUDING THE ASSESSEE WOULD HAVE CLAIMED DEDUCTIO N UNDER SECTION 80-IB ON SUCH HIGHER AMOUNTS OF PROFI TS. IN OTHER WORDS WHAT THE CIT(A) HAS SUGGESTED IS TO IMAGINE A STATE OF AFFAIRS WHERE THERE WAS NO CSM A ND HAS PROCEEDED TO HOLD THAT IN SUCH A CASE THE PROFI TS MADE BY CSM WOULD HAVE BEEN EARNED BY THE ASSESSEE FIRM WHICH WOULD HAVE ADDED TO ITS PROFITS FROM TH E MANUFACTURING ACTIVITY AND THUS THERE WOULD HAVE BE EN HIGHER PROFITS SHOWN BY THE ASSESSEE FOR PURPOSES O F DEDUCTION UNDER SECTION 80-IB. THE RESULT OF THIS OBSERVATION OF THE CIT(A) IS THAT BY CREATING A MAR KETING ARM THE ASSESSEE WAS ACTUALLY CLAIMING DEDUCTION UN DER SECTION 80-IB IN RESPECT OF LESSER PROFITS. (G) THERE WAS NO UNDUE TRANSFER OF EXPENSES FROM TH E ASSESSEE TO ITS MARKETING ARM AND THEREFORE SUB-S ECTION (10) OF SECTION 80-IA READ WITH SUB-SECTION (13) OF SECTION 80-IB WAS NOT APPLICABLE. (H) THE ASSESSEE HAS NOT BEEN FOUND TO HAVE INFLATE D THE PROFIT EARNED ON TRANSACTIONS MADE WITH CSM. THE 8 ASSESSING OFFICER HAS ALSO NOT SHOWN THAT THE TRANSACTIONS OF THE ASSESSEE WITH ANY OTHER PARTY W ERE NOT GENUINE. (I) THE ASSESSING OFFICER HAS NOT RECORDED ANY ADVE RSE FINDINGS IN THE ASSESSMENT ORDER REGARDING THE BOOK S OF ACCOUNTS NOR HAS HE REJECTED THE ASSESSEES BOOKS. THEREFORE THE PROFIT FIGURE SHOWN BY THE ASSESSEE CANNOT BE REJECTED MERELY BECAUSE THE ASSESSEE HAD SHOWN HIGHER PROFIT THAN SOME OTHER MANUFACTURERS. (J) THE ASSESSING OFFICER HAS ACTED ARBITRARILY IN TRANSFERRING HALF OF THE PROFIT OF THE ASSESSEE TO THE MARKETING ARM MERELY TO RESTRICT THE DEDUCTION. IN VIEW OF THE ABOVE FINDINGS THE CIT(A) DIRECTED THE ASSESSING OFFICER TO ALLOW DEDUCTION UNDER SECTION 80-IB IN RESPECT O F THE ENTIRE PROFIT OF RS.8 41 84 226/-. HE THUS ALLOWED THE ASSESSEES A PPEAL. 6. THE REVENUE IS IN APPEAL AND ITS MAIN CONTENTION S ARE THAT THE MANUFACTURING EXPENSES OF THE ASSESSEE WERE SHIFTED TO ITS MARKETING ARM TO AVAIL OF HIGHER DEDUCTION UNDER SECTION 80-I B AND THIS WAS CLEAR FROM THE TWO COMPARABLE CASES CITED IN THE ASSESSME NT ORDER AND THREE MORE COMPARABLE CASES CITED BY THE ASSESSING OFFICER IN HIS REMAND REPORT AT PAGE 115 OF THE PAPER BOOK. IT I S FURTHER CONTENDED THAT THE ASSESSING OFFICER HAS THE NECESSARY AUTHOR ITY UNDER SUB- SECTION (10) OF SECTION 80-IA READ WITH SUB-SECTION (13) OF SECTION 80-IB TO REDUCE THE PROFIT OF THE ASSESSEE FIRM BY SHOWIN G THAT IT HAS SO ARRANGED ITS BUSINESS WITH CSM THAT MORE PROFITS TH AN WHAT WOULD 9 HAVE ORDINARILY ACCRUED TO IT WERE EARNED BY IT. O UR ATTENTION WAS DRAWN TO THE RELEVANT FINDINGS IN THE ASSESSMENT OR DER AS WELL AS THE REMAND REPORT FILED BY THE ASSESSING OFFICER BEFORE THE CIT(A). 7. ON THE OTHER HAND THE LEARNED COUNSEL FOR THE A SSESSEE CONTENDED THAT [A] SUB-SECTION (10) OF SECTION 80 -IA CAN BE INVOKED ONLY IF BECAUSE OF THE CLOSE CONNECTION BETWEEN THE ASSESSEE AND ANY OTHER PERSON OR FOR ANY OTHER REASON THE COURSE O F BUSINESS BETWEEN THEM IS SO ARRANGED THAT THE BUSINESS TRANSACTED BE TWEEN THEM PRODUCES MORE PROFITS TO THE ASSESSEE THAN ORDINARY PROFITS AND THIS CAN HAPPEN ONLY IF THE ASSESSEE SELLS GOODS TO THE OTHER ENTITY AT AN ARTIFICIALLY INFLATED PRICE; AND [B] EVEN ON MERITS THE PROFITS EARNED BY THE ASSESSEE WERE NOT EXTRA ORDINARILY HIGH SO AS T O JUSTIFY THE REDUCTION OF THE CLAIM UNDER SECTION 80-IB. IN SUP PORT OF THE SUBMISSION [B] THE LEARNED COUNSEL FOR THE ASSESSE E TOOK US THROUGH THE PAPER BOOK AND THE FINDINGS RECORDED BY THE ASS ESSING OFFICER AND SOUGHT TO DEMONSTRATE THAT THEY WERE WRONG. 8. SO FAR AS THE SUBMISSION [A] IS CONCERNED IT CA N BE TAKEN UP LATER IF NECESSARY BECAUSE IN OUR VIEW SUBMISSION [B] HAS MERIT AND REQUIRES TO BE ACCEPTED FOR THE FOLLOWING REASONS: - WE HAVE ALREADY SEEN THAT CSM WAS FORMED ON 01.04.2 001 WHEREAS THE ASSESSEE CAME INTO EXISTENCE SUBSEQUENT LY IN MARCH 2004. IT CANNOT THEREFORE BE SAID THAT THE MARKETI NG ARM WAS CREATED ONLY TO ENABLE THE ASSESSEE TO SHIFT ITS EXPENSES T O THE MARKETING ARM. EVEN IF IT IS ARGUED THAT THIS MAY NOT BE CONCLUSIV E AND THAT EVEN THOUGH THE ASSESSEE FIRM CAME INTO EXISTENCE LATER IT WAS STILL POSSIBLE 10 FOR IT TO MAKE USE OF THE MARKETING ARM TO SHIFT IT S EXPENSES IT IS NOT PERMISSIBLE TO VIEW WITH SUSPICION THE RELATIONSHIP BETWEEN THE ASSESSEE AND ITS MARKETING ARM BECAUSE AS FOUND BY THE CIT(A) CSM WAS FORMED FOR BUSINESS REASONS THE MAIN REASON BE ING TO ENABLE THE STOCKIST OF THE CELLO GROUP OF CONCERNS TO DEAL WIT H A SINGLE ENTITY OR A SINGLE WINDOW INSTEAD OF DIFFERENT MANUFACTURING CO NCERNS OF THE GROUP RESULTING IN CONFUSION AND OVERLAPPING. NO EVIDENCE HAS BEEN LED ON BEHALF OF THE DEPARTMENT BEFORE US OR IN THE ASSESSMENT ORDER TO DEMONSTRATE THAT THIS WAS NOT THE REAL REASON FO R WHICH THE MARKETING ARM WAS CREATED. THE MARKETING ARM HAS A LSO BEEN SEPARATELY ASSESSED AND THIS SHOWS THAT IT HAS BEEN LOOKED UPON BY THE INCOME TAX AUTHORITIES AS A SEPARATE LEGAL ENTI TY CARRYING ON ITS OWN BUSINESS AND ENJOYING PROFITS FOR ITSELF. TO A SPECIFIC QUERY POSED BY US IN THE COURSE OF THE ARGUMENTS THE LEARNED D EPARTMENTAL REPRESENTATIVE STATED THAT NO EXPENSES CLAIMED BY C SM IN ITS ASSESSMENT TO INCOME TAX HAVE BEEN DISALLOWED ON TH E GROUND THAT THE EXPENSES DID NOT RELATE TO ITS MARKETING ACTIVI TIES. EVEN IN THE ASSESSMENT ORDER IN THE PRESENT CASE THERE IS NO S UGGESTION THAT THE EXPENSES CLAIMED BY CSM IN ITS RETURN DID NOT IN FA CT RELATE TO ITS ACTIVITIES. NOR IS THERE ANY EVIDENCE TO SHOW THAT ANY PART OF THE EXPENSES WERE RELATED TO THE ACTIVITIES OF THE ASSE SSEE FIRM BUT DELIBERATELY DEBITED IN THE BOOKS OF ACCOUNTS OF CS M. 9. THE LEARNED COUNSEL FOR THE ASSESSEE DEMONSTRATE D BEFORE US THAT THE TABLE GIVEN AT PAGE 3 OF THE ASSESSMENT OR DER SHOWING THAT THE ASSESSEE CLAIMED ONLY TRAVELLING AND CONVEYANCE EXPENSES OF 11 RS.62 298/- WHILE COMPUTING ITS PROFITS IS FACTUALL Y ERRONEOUS. THE ACCOUNTS OF THE ASSESSEE FOR THE YEAR UNDER CONSIDE RATION WERE FILED BEFORE US IN THE COURSE OF THE HEARING FROM WHICH WE FIND THAT THE PROFIT AND LOSS ACCOUNT SHOWS AN AGGREGATE EXPENDIT URE OF RS.6 94 22 917/- CONSISTING OF THE FOLLOWING: - (A) RAW & PACKING MATERIALS CONSUMED .. RS.5 07 52 869/- (B) MANUFACTURING EXPENSES .. RS. 34 30 234/- (C) ADMINISTRATIVE SELLING & DISTRIBUTION EXPENSES .. RS. 70 30 738/- (D) DEPRECIATION .. RS. 82 09 076/- THE AFORESAID ITEMS OF EXPENDITURE HAVE ALSO BEEN D ETAILED IN SCHEDULES J K L AND B OF THE FINANCIAL ST ATEMENTS RESPECTIVELY AND A PERUSAL THEREOF SHOWS THAT THE ASSESSEE FIRM HAS INCURRED THE NORMAL EXPENSES WHICH ANY MANUFACTURING CONCERN WOU LD INCUR. APART FROM RAW MATERIALS AND PACKING MATERIALS CONSUMED THE MANUFACTURING EXPENSES INCLUDES WAGES CARRIAGE INW ARD PRODUCTION INCENTIVE LABOUR PAYMENTS SUCH AS PROVIDENT FUND HRA LABOUR WELFARE EXPENDITURE BONUS ETC. THERE ARE ALSO PO WER & WATER CHARGES CARRIAGE OUTWARD LOADING & UNLOADING CHAR GES ETC. SCHEDULE L SHOWS ADMINISTRATIVE SELLING AND DIST RIBUTION EXPENSES AND IN FACT ALSO INCLUDES SALES PROMOTION EXPENSES OF RS.46 92 370/-. THE CLAIM OF DEPRECIATION AS PER SCHEDULE B SHOWS THE EXISTENCE OF PLANT & MACHINERY TOOLS & EQUIPMENTS ELECTRICAL I NSTALLATION FURNITURE & FIXTURES ETC. ALL THESE FIGURES OF EXPENSES DEB ITED IN THE ASSESSEES ACCOUNTS FOR THE YEAR UNDER APPEAL SHOW THAT THE CO NCLUSION OF THE ASSESSING OFFICER THAT THE ASSESSEE DID NOT INCUR A NY EXPENDITURE OTHER THAN TRAVELLING AND CONVEYANCE EXPENSES IS BA SELESS. 12 10. A LOOK AT THE PROFIT & LOSS ACCOUNT OF CSM FOR THE YEAR ENDED 31.03.2005 SHOWS THAT IT HAS INCURRED THE USUAL EXP ENSES WHICH ANY MARKETING ORGANIZATION WOULD INCUR. FOR INSTANCE IT HAS PAID SALARIES OF RS.1 73 38 510/-; CARRIAGE OUTWARD & OCTROI OF R S.2 85 16 643/-; SALES COMMISSION OF RS.30 82 084/-; SALES PROMOTION EXPENSES OF RS.4 48 37 995/-; ADVERTISEMENT EXPENSES OF RS.10 4 2 47 006/-; OUTSTATION STAFF EXPENSES OF RS.1 39 20 825/- ETC. THE GROSS PROFIT OF CSM AMOUNTED TO RS.22 31 69 180/- AND THE AFORESAID EXPENDITURE HAS BEEN INCURRED OUT OF THE SAME. NEITHER THE ASS ESSING OFFICER NOR THE LEARNED SENIOR DR APPEARING FOR HIM BEFORE US C OULD PINPOINT AS TO WHICH OF THE ITEMS OF EXPENDITURE DEBITED IN THE PR OFIT & LOSS ACCOUNT OF CSM RELATED TO THE MANUFACTURING ACTIVITIES OF T HE ASSESSEE. THEREFORE THE CONCLUSION OF THE ASSESSING OFFICER THAT THE ASSESSEE HAD INFLATED ITS PROFITS BY SHIFTING ITS EXPENDITUR E TO ITS MARKETING ARM APPEARS TO HAVE NO FACTUAL BASIS. 11. A PERUSAL OF THE RESULTS OF M/S CELLO PLASTIC P RODUCTS ONE OF THE GROUP CONCERNS FOR THE ASSESSMENT YEARS 2002-03 TO 2005-06 (PAGE 64 OF THE PAPER BOOK) SHOWS THE FOLLOWING POSITION: - ASSESSMENT YEAR NET PROFIT RATE 2002-03 49.40% 2003-04 46.56% 2004-05 39.67% 2005-06 40.48% THE ABOVE FIGURES SHOW THAT THE NET PROFIT RATE IN THE GROUP CONCERNS IS QUITE HIGH. EVEN IN THE ASSESSEES OWN CASE IT IS SHOWN AS NET PROFIT RATE OF 44.10% FOR THE ASSESSMENT YEAR 2006-07. IT WOULD THEREFORE 13 APPEAR THAT THERE IS NOTHING UNUSUAL TO RAISE THE E YEBROWS IF THE ASSESSEE HAS SHOWN 55.67% OF NET PROFIT ON ITS SALE S. 12. ON THE OTHER SIDE IF WE COMPARE THE NET PROFIT RATE OF CERTAIN SUPER STOCKIST OF THE ASSESSEE ALSO DEALING IN WRI TING INSTRUMENTS FOR THE ASSESSMENT YEARS 2005-06 AND 2006-07 THEY SHOW THAT THEIR NET PROFIT RATE IS VERY LOW AS IN THE CASE OF THE LOW N ET PROFIT OF 0.17% SHOWN BY CSM. THE ASSESSEE HAS PLACED THESE DETAIL S AT PAGE 121 OF THE PAPER BOOK WHICH IS A COPY OF THE WRITTEN S UBMISSIONS FILED BEFORE THE CIT(A). IT SHOWS THE FOLLOWING POSITION : - NAME ASSESSMENT YEAR ASSESSMENT YEAR 2005-06 2006-07 --------------- ------------------------ --------- --------------- 1. TIKU WRITING INSTRUMENTS 1.01% 0.62% AHMEDABAD 2. KONICA ENTERPRISES 0.62% 0.80% MUMBAI 3. PADMA MARKETING 0.36% 0.42% BARODA IT MAY BE SEEN THAT THE NET PROFIT RATE OF THREE DI FFERENT SUPER STOCKIST OF THE ASSESSEE SHOW VERY LOW NET PROFIT RATES AND IT IS THEREFORE NOT UNUSUAL THAT CSM WHICH WAS THE MARKETING ARM OF TH E ASSESSEE AND OTHER GROUP CONCERNS HAS BEEN ABLE TO EARN ONLY A NET PROFIT RATE OF 0.17%. IT CANNOT BE CONSIDERED TO BE ABNORMALLY LO W. 13. TURNING TO THE COMPARABLE CASES GIVEN BY THE AS SESSING OFFICER IT IS SEEN THAT SO FAR AS M/S TODAYS WRITI NG PRODUCTS LIMITED IS CONCERNED CITED IN THE ASSESSMENT ORDER WHICH HAS SHOWN NET PROFIT RATE OF 7% TO 12% AS PER THE UNAUDITED FINANCIAL RE SULTS PUBLISHED IN THE ECONOMIC TIMES FOR THE YEAR ENDED 31.03.2007 I T IS NOT KNOWN AS 14 TO WHAT IS THE STATURE OF THAT COMPANY IN THE WRITI NG INSTRUMENTS MARKET SO THAT IT CAN STAND THE TEST OF COMPARISON. THE A SSESSEE GROUP IT IS STATED BEFORE US ENJOYS 38% SHARE IN THE WRITING I NSTRUMENTS AND STATIONERY MARKET AND THUS HAS A VERY HIGH BRAND VA LUE AND GOODWILL. ITS STATURE IN THE MARKET IS VERY HIGH AND OBVIOUSL Y THEREFORE THE FIGURES CANNOT BE COMPARED WITH THOSE OF M/S TODAYS WRITING PRODUCTS LIMITED. IT IS ALSO SEEN THAT THIS COMPANY IS ALSO HAVING TRADING ACTIVITIES AND THEREFORE THE PRODUCT MIX IS NOT K NOWN AND THIS ALSO MAKES THE COMPARISON DIFFICULT. AS REGARDS THE CAS E OF M/S GAUTAM INDUSTRIES CITED IN THE ASSESSMENT ORDER THERE ARE ABSOLUTELY NO DETAILS FROM WHICH IT CAN BE KNOWN AS TO WHETHER IT IS A COMPARABLE CASE AT ALL. WE DO NOT HAVE THE DETAILS OF THE TUR NOVER THE BRAND NAME THE PRODUCT MIX ETC. TO TEST THE VALIDITY OF THE COMPARISON. THE SAME THING HAS TO BE SAID ABOUT THE THREE OTHER COM PARABLE CASES GIVEN BY THE ASSESSING OFFICER IN THE REMAND REPORT NAMELY RASHMI WRITING INSTRUMENTS PRAYAS WRITING INSTRUMENTS AND MONTEX WRITING INSTRUMENTS. THEY HAVE SHOWN NET PROFIT PERCENTAGE OF 16.12 17.63 AND 6.55 RESPECTIVELY. IN THE ABSENCE OF THE DETAI LS OF THEIR TURNOVER MARKET SHARE ETC. AGAIN IT IS NOT POSSIBLE TO HAVE A COMPARISON BETWEEN THEM AND THE ASSESSEE. 14. THE LEARNED COUNSEL FOR THE ASSESSEE HAS CITED A FEW AUTHORITIES NAMELY ITO VS. PCA ENGINEERS LTD. (19 84) 8 ITD 518 (MUM); ITO VS. NOVEL CONSUMER PRODUCTS (P) LTD. (20 06) 7 SOT 615 (MUM) AND THE JUDGMENT OF THE SUPREME COURT IN VNM ARUNACHALA NADAR VS. CEPT (1962) 44 ITR 352 (SC). HOWEVER SI NCE WE ARE 15 DEALING WITH A FACTUAL ISSUE IT IS NOT NECESSARY T O REFER TO THESE AUTHORITIES AND EXAMINE THEIR APPLICABILITY TO THE PRESENT CASE. 15. FOR THE ABOVE REASONS WE ARE SATISFIED THAT THE DECISION OF THE CIT(A) IS UNEXCEPTIONABLE. WE AGREE WITH HIS FINDI NGS AND THE ULTIMATE CONCLUSION THAT THE ASSESSEE IS ENTITLED TO THE DED UCTION UNDER SECTION 80-IB IN RESPECT OF ITS ENTIRE PROFITS OF RS.8 41 8 4 226/-. 16. IN THE VIEW WE HAVE TAKEN ON THE MERITS OF THE APPLICABILITY OF SECTION 80-IA(10) READ WITH SECTION 80-IB(13) IT I S NOT NECESSARY FOR US TO CONSIDER THE LEGAL CONTENTION OF THE LEARNED COU NSEL FOR THE ASSESSEE THAT THE ASSESSING OFFICER HAS NO JURISDIC TION TO INVOKE THE ABOVE PROVISION SINCE HE HAS NOT PROVED THAT THE CO URSE OF BUSINESS BETWEEN THE ASSESSEE AND CSM WAS SO ARRANGED THAT T HE BUSINESS TRANSACTED BETWEEN THEM PRODUCED MORE THAN ORDINARY PROFITS TO THE ASSESSEE AND THAT THE WORDS BUSINESS TRANSACTED I N THE PROVISION REFERS ONLY TO THE SALES MADE BY THE ASSESSEE TO CS M. IN DECIDING THE CASE ON MERITS WE HAVE PROCEEDED ON THE ASSUMPTION THAT THE ASSESSING OFFICER RIGHTLY ASSUMED JURISDICTION UNDE R THE STATUTORY PROVISIONS NOTED ABOVE. 17. IN THE RESULT THE APPEAL OF THE DEPARTMENT IS DISMISSED WITH NO ORDER AS TO COSTS. ORDER PRONOUNCED ON 23 RD FEBRUARY 2010. SD/- SD/- (T R SOOD) (R V EASWAR) ACCOUNTANT MEMBER SENIOR VICE PRESI DENT MUMBAI DATED 23 RD FEBRUARY 2010 SALDANHA 16 COPY TO: 1. M/S CELLO STATIONERY PRODUCTS 5 VAKIL INDUSTRIAL ESTATE WALBHAT ROAD GOREGAON (EAST) MUMBAI 400 063 2. DCIT 24(3) 3. CIT-24 4. CIT(A)-XXIV 5. DR C BENCH TRUE COPY BY ORDER ASSTT. REGISTRAR ITAT MUMBAI