Tuesday, June 25, 2013

Differentiating between whisky and non-whisky alcoholic beverages is undesirable for comparability under TNMM

Product similarity was to be seen for applying CUP method and not for TNMM. If assessee sold non-whisky alcoholic beverages (Vodka, Gin, Brandy, Rum, etc) to non-AEs and whisky to AEs, net profit margin on sale by assessee of non-whisky alcoholic beverages couldn’t be rejected as internal TNMM for calculating ALP on assessee's sale of whisky to AEs simply based on distinction made between whisky & non-whisky as two different products

The Tribunal held as under:

1) The profitability derived from uncontrolled party engaged in similar business activity under similar circumstances was the measure of arm's length result. The focus under the TNMM was on transactions rather than on operating income of the enterprise as a whole;

2) If there was similar nature of transactions and functions between controlled transactions with the related party and uncontrolled transactions with unrelated party, then internal comparability would result into more appropriate result for computing  ALP, as it would require least amount of adjustments;

3) The product similarity was to be seen while applying CUP method and not under the TNMM because under the CUP, the focus had to be on the price of the product sold or transferred;

4) In assessee's case, both the transactions with the A.Es and unrelated parties related to alcoholic beverages, which were in similar business line. Making intra-distinction between types of alcoholic beverages like "whisky" and "other than whisky", was wholly undesirable while carrying out comparability analysis under the TNMM;

5) Under the TNMM, functional comparability of transactions was to be analyzed at net profit margin level. If such a high degree of similarity was to be seen in TNMM, then it would become impractical to apply TNMM in any case;

6) Rejection of internal TNMM simply on the basis of distinction between whisky and non–whisky as two different products was wholly undesirable and, therefore, adjustment made by TPO was to be deleted - Diageo India (P.) Ltd. v. DY.CIT [2013] 34 taxmann.com 284 (Mumbai - Trib.)

Resultant Co. can file appeal after demerger; abundant caution appeal by demerged Co. dismissed to avoid duplicity

Appeals filed by demerged company under the apprehension that the original appeals filed by the resulting company might not be held as maintainable, were not permissible. Such duplicate appeals might lead to a serious problems  if they remained un-noticed, because mistakenly two judgments could be delivered and that might lead to a serious error.

The Tribunal held as under:

1) Demerger implies transfer of all the assets and liabilities of the undertaking or division by a 'demerged company' to a 'resulting company'. In consequence of assets being taken over by a ‘resulting co’ it would be responsible and would have the rights to be a party to the litigation to protect its interest;

2) A resulting company on one hand acquired the assets and on the other hand it was responsible for the liabilities, including tax liability;

3) As per sub-section (vi) of section 2(19AA), the transfer of the undertaking was on a going concern basis, meaning thereby, that as a result of demerger the effected undertaking would loose it’s independent legal identity which merged with the resultant company. Its entity thereafter vested in the resulting company. As a natural corollary the litigation couldn’t be pursued against a non-existing legal body;

4) As a result of demerger an undertaking or a unit of demerged company was transferred to a resulting company. Therefore, after the transfer, the demerged  company was not to be held responsible for any legal action but the transferee- company was legally answerable and accountable thereafter;

5) Appeals filed by the demerged company under the apprehension that the original appeals filed by the transferee-company (resulting company) might not be held as maintainable, were nothing but the duplicate appeal, which was not permissible in the eyes of law;

6) Such duplicate appeals might lead to a serious problems if these remained un-noticed, because mistakenly two judgments could be delivered and that might lead to a serious error. Duplicity is void ab initio hence appeals were required to be dismissed - Cairn Energy Gujarat BV v. ADIT [2013] 34 taxmann.com 281 (Ahmedabad - Trib.)

ITAT rejects recall application filed by CA in ‘personal’ capacity; directs ICAI to act suitably for his misconduct

CA appearing as Authorised representative (‘AR’) for client had no locus standi to file any application before ITAT in his individual capacity without the client’s consent, after disposal of client’s appeal. CA’s conduct of filing such application after the date of Tribunal’s order disposing it off in his client’s favour was contemptuous, abuse of process of law and scandalized the system of delivery of justice

The Tribunal held as under:

1) Once the appeal was disposed off, the power conferred upon the professionals or the AR by virtue of the Power of Attorney by the assessee, came to an end. They didn’t have any locus standi to file any application before the Tribunal in his individual capacity because the Tribunal was not created to redress the grievances of the professionals;

2) Its function was to adjudicate the disputes between the assessee and the Department. The appeal was allowed in favour of the assessee and the assessee had no grievance against the order passed by the Tribunal. Instant application was filed  by the CA with an ulterior motive for the reasons best known to him, disputing the facts recorded in the order sheet;

3) After disposal of the appeal, an application could be filed on behalf of the assessee under section 254(2) of the Act for seeking rectification in the order passed under section 254(1) of the Income Tax Act. But there was no provision under the Act in which an application could be filed by any Advocate or CA or AR in his individual capacity for seeking rectification in the proceedings of the hearing, without the consent of the assessee;

4) Moreover, to dispute the proceedings of the court, without any cogent material, was also an attempt to scandalize the court and also to create hindrance in the proper judicial functioning of the court, which couldn’t be permitted under any circumstances. If it was allowed the judicial system would collapse;

5) Since the facts recorded in the order sheet had not been controverted by filing an affidavit, the judicial proceedings were correct and the contentions raised in the application were highly misconceived, wrong and contemptuous. Therefore, the instant application was moved with an intention to browbeat and scandalize the court. Since the action of CA was grossly abuse of process of law, application was dismissed with cost of Rs 5,000 to be recovered from him;

6) This tough stand was being taken only to maintain the dignity, decorum of the institution and justice delivery system so that it might not be misused by any professional to settle their personal score. If they had any grievance against any judicial forum they could approach the higher forum instead of scandalizing the concerned court or judicial body;

7) Reference made to the President of ICAI with a request to take necessary action as per law against the CA for his professional misconduct and also to take corrective measures and necessary steps to educate its members, to behave with the judicial authorities befitting to their status - Omkar Nagreeya Sahkari Bank Ltd v. DyCIT [2013] 34 taxmann.com 283 (Lucknow - Trib.)

Admissions made during survey are not conclusive unless supported by convincing evidences

Addition on the basis of seized material was unjustified if assessee was able to show that the admissions made during survey were incorrect

In the instant case, during search and seizure operation on assessee-firm, the survey party worked out the certain value of excess stock by preparing a provisional trading account. The partners of assessee-firm, not being able to explain the excess stock, surrendered the same and agreed to pay tax on the value of excess stock. The excess cash found during survey was declared by the partners as income of firm other than regular income. The return filed after survey didn’t disclose the excess stock and excess cash found during survey. Consequently, the AO made addition for excess stock under section 69 and on account of excess cash under section 69A. The CIT(A), substantially reduced the addition made by the AO. Aggrieved by the order of CIT(A), revenue filed the instant appeal.

The Tribunal held in favour of assessee as under:

1) It is a well-settled law that admissions are not conclusive proof of the matter. They may be shown to be untrue or having been made under mistake of fact or law. Circumstances have to be seen under which same are made;

2) Admissions could be withdrawn unless it was conclusive. The Supreme Court in the case of Pullangode Rubber Produce Co. Ltd. v. State of Kerala [1973] 91 ITR 18, had held that the assessee was to be given opportunity to show that admission was incorrect or didn’t show correct state of facts. The Punjab & Haryana High Court in the case of Kishan Lal Shiv Chand Rai v. CIT [1973] 88 ITR 293, had held that it was an established principle of law that a party was entitled to show and prove that admission made by it, was, in fact, not correct and true;

3) The sole basis of making addition, i.e., provisional trading account was not found to have correct figures of purchase and sales. Whatever items had been declared by the assessee on account of excess stock were correctly considered by the CIT(A). Since the figures of the sales and purchases were based on factual figures, it was a case of factual mistake committed by the Survey party as well as by the AO, which had been rightly corrected by the CIT (A);

4) Thus, the assessee on the basis of seized material had been able to show that the admission made at the time of survey, surrendering the additional income on account of excess stock was not correct and did not show correct state of facts. The CIT(A) correctly deleted the addition as no addition could be made against the assessee on the basis of mere admission. Therefore, the departmental appeal was to be dismissed – ACIT V. MAYA TRADING CO. [2013] 34 taxmann.com 144 (Agra - Trib.)