THE ACIT 16(3), MUMBAI v. M/S. TWINKLE DIMOND, MUMBAI

ITA 5033/MUM/2007 | 2004-2005
Pronouncement Date: 30-04-2010

Appeal Details

RSA Number 503319914 RSA 2007
Assessee PAN AAAFT1133F
Bench Mumbai
Appeal Number ITA 5033/MUM/2007
Duration Of Justice 2 year(s) 9 month(s) 11 day(s)
Appellant THE ACIT 16(3), MUMBAI
Respondent M/S. TWINKLE DIMOND, MUMBAI
Appeal Type Income Tax Appeal
Pronouncement Date 30-04-2010
Appeal Filed By Department
Bench Allotted L
Date Of Final Hearing 06-04-2010
Next Hearing Date 06-04-2010
Assessment Year 2004-2005
Appeal Filed On 19-07-2007
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH L BEFORE SHRI N.V. VASUDEVAN (JM) & J. SUDHAKAR REDDY (AM) I.T.A.NO. 5033/MUM/07 (ASSESSMENT YEAR : 2004-05) ACIT 16(3) MATRU MANDIR TARDEO ROAD MUMBAI-400 007. VS. M/S. TWINKLE DIAMOND 404 PRASAD CHAMBERS OPERA HOUSE MUMBAI-400 004. APPELLANT RESPONDENT PAN/GIR NO. : AAAFT1133F ASSESSEE BY : SHRI B.V. ZAVERI DEPARTMENT BY : SHRI AARSI PRASAD ORDER PER J. SUDHAKAR REDDY AM :- THIS IS AN APPEAL FILED BY THE REVENUE AGAINST THE ORDER DATED 27.4.2007 OF LEARNED CIT(A)-XVII MUMBAI FOR A.Y. 2 004-05. 2. FACTS IN BRIEF : THE ASSESSEE IS A FIRM ENGAGED IN THE BUSINESS ACT IVITY OF MANUFACTURING AND EXPORT OF CUT AND POLISHED DIAMON DS. THE ASSESSEE FILED ITS RETURN OF INCOME AND HAS ALSO FILED AN AU DIT REPORT IN FORM NO. 3CEB IN THE CASE OF INTERNATIONAL TRANSACTION IN CO MPLIANCE WITH SECTION 92E. THE ASSESSING OFFICER REFERRED THE MATTER TO T RANSFER PRICING OFFICER (IN SHORT TPO) U/S. 92CA(1) OF THE ACT FOR DETERMIN ATION OF ARMS LENGTH PRICE (IN SHORT ALP). THE TPO VIDE HIS ORDER DATED 22.12.2006 HAD BROUGHT OUT THE FACTS AT PARA NO. 4&5 WHICH IS EXT RACTED FOR READY REFERENCES :- 4) THE TOTAL SALES OF THE ASSESSEE COMPANY IS RS. 35.8 1 CRORES AND TOTAL PURCHASES AMOUNTING TO RS. 45.37 CROES. D URING THE YEAR THE ASSESSEE MADE SALES OF RS. 7.66 CRORE S AND PURCHASES OF RS. 14.36 CRORES FROM ITS AE. THESE PURCHASES CONSISTED OF 31.65% OF TOTAL PURCHASES BY THE ASSESSEE AND SALES ARE 21.41% OUT OF TOTAL SALES. D URING THE M/S. TWINKLE DIAMOND 2 YEAR THE ASSESSEE HAS REPORTED AN OPERATING MARGIN ON SALES AND ON COST @ 3.58% AND 2.82% RESPECTIVELY. 5) THE ASSESSEE HAS USED CPM FOR PURCHASE AND CPM FOR SALES FOR COMPUTING THE ALP OF THE INTERNATIONAL TRANSACT IONS. CPM METHOD USED BY THE ASSESSEE IS REJECTED SINCE THE ASSESSEE HAS NOT FURNISHED THE GROSS MARGIN EARNED BY IT ON INTERNATIONAL TRANSACTIONS AND THE GROSS MARGIN EARNED BY THE COMPARABLES. FURTHER IN CASE OF CPM ONE TO ONE COMPARABLES I.E. INVOICE BY INVOICE ARE NOT PROVIDE D BY THE ASSESSEE. FURTHER THE COMPARABLES USED AND REASONI NG FOR CONSIDERING THE SAME AS COMPARABLES HAS NOT BEEN PROVIDED. ALSO THIS OFFICE CANNOT USE EXTERNAL COMP ARABLES IN THE FORM OF LIMITED COMPANIES FOR CPM SINCE THE MANNER IN WHICH THE FINANCIAL STATEMENTS OF COMPANIES ARE AVAILABLE; IT IS DIFFICULT TO COMPUTE ACCURATE GROS S MARGINS. HENCE METHOD OF LAST RESORT I.E. TNMM IS SELECTED AS THE MOST APPROPRIATE METHOD. THEREAFTER THE TPO ASKED THE ASSESSEE TO SHOW-CAUS E WHY TNMM SHOULD NOT BE CONSIDERED. THEREAFTER THE TPO HAD TAKEN EN TITY LEVEL OPERATING MARGIN OF VARIOUS OTHER ENTERPRISES WHICH ACCORDIN G TO THE TPO ARE COMPARABLE ENTERPRISES. AS PER THE TPO OPERATIONA L MARGIN TO SALES OF DIFFERENT UNITS WITH AN AVERAGE WORKS OUT TO 5.34% AND OPERATIVE PROFIT TO SALES OF THE ASSESSEE WORKS OUT TO 3.58%. AFTER CONSIDERING VARIOUS OBJECTIONS OF THE ASSESSEE TPO HAD ARRIVED AT THE CONCLUSION THAT TRANSACTIONS OF SALES TO THE ASSOCIATED ENTERPRISES IS NOT AT ALP. HE SUGGESTED AN ADJUSTMENT OF RS. 63 00 000/-. THE ASSESSING OFFICER IN VIEW OF SECTION 92CA(4) PROCEEDED TO COMPUTING TOTAL INCOME OF THE ASSESSEE BY MAKING AN ADDITION OF RS. 63 00 000/- AS DETERMINED BY THE TPO. FURTHER THE A SSESSING OFFICER CONSIDERED THE CLAIM OF THE ASSESSEE FOR EXEMPTION U/S. 80HHC WITH REGARD TO INTEREST AS WELL AS WITH REGARD TO EXPORT OF ROUGH DIAMOND. AS FAR AS INTEREST INCOME IS CONCERNED AS THE ASS ESSEE HAS NOT FURNISHED ANY EXPLANATION THE ASSESSING OFFICER TR EATED INTEREST INCOME IN QUESTION AS INCOME FROM OTHER SOURCES. NO RELI EF WAS GIVEN U/S. 80HHC. AS FAR AS EXPORT OF ROUGH DIAMOND IS CONCERNED TH E ASSESSING OFFICER RELIED ON THE DECISION OF MUMBAI BENCH OF T HE TRIBUNAL IN THE M/S. TWINKLE DIAMOND 3 CASE OF M/S. CLASSIC DIAMOND 75 ITD 245 AND DENIED THE RELIEF TO THE ASSESSEE. 3. AGGRIEVED THE ASSESSEE CARRIED THE MATTER IN AP PEAL. FIRST APPELLATE AUTHORITY AFTER CONSIDERING VARIOUS SUBMI SSIONS OF THE ASSESSEE RECOMPUTED ALP AND CAME TO THE CONCLUSION THAT NO ADJUSTMENT WAS NECESSARY AS THE COMPUTED PRICE IS W ITHIN THE RANGE OF PLUS OR MINUS 5% AS PRESCRIBED BY THE BOARD. COMING TO THE INTEREST INCOME HE HELD THAT THE SAME IS ASSESSABLE UNDER T HE HEAD BUSINESS INCOME; BUT AT THE SAME TIME HELD THAT WHILE COMP UTING RELIEF U/S. 80HHC 90% OF GROSS INTEREST HAS TO BE ELIMINATED F ROM PROFIT OF THE BUSINESS. ON AN EXPORT OF ROUGH REJECTION DIAMONDS LEARNED C IT(A) FOLLOWED THE DECISION OF THE TRIBUNAL IN THE CASE OF M/S. SH EETAL MANUFACTURING CO. VS. ITO IN ITA NO. 1143/MUM/02 FOR A.Y. 1998-99 AND GRATED RELIEF TO THE ASSESSEE. AGGRIEVED THE REVENUE IS IN APPEAL ON THE F OLLOWING GROUNDS :- 1) THAT THE LEARNED CIT(A) HAS ERRED IN LAW AND ON FAC TS IN DELETING THE ADDITION OF RS. 63 00 000/- MADE ON AC COUNT OF TP ADJUSTMENT U/S. 92CA(3) OF THE I.T. ACT 1961 A S WORKED OUT BY THE TPO. 2) THAT LEARNED CIT(A) HAS ERRED IN LAW AND ON FACTS I N DIRECTING THE ASSESSING OFFICER TO TREAT THE INTERE ST ON FDR AMOUNTING TO RS. 1 16 228/- AS BUSINESS INCOME INST EAD OF INCOME FROM OTHER SOURCES IGNORING VARIOUS COURT DE CISION INCLUDING APEX COURT DECISION IN THE CASE OF M/S. T UTICORIN ALKALI CHEMICALS AND FERTILIZERS VS. CIT 227 ITR 1 72 (SC) 3) THAT LEARNED CIT(A) HAS ERRED IN LAW AND ON FACTS I N DIRECTING NETTING OF INTEREST. 4) THAT LEARNED CIT(A) HAS ERRED IN LAW AND ON FACTS I N DIRECTING THE ASSESSING OFFICER TO EXCLUDE THE EXPO RT RECEIPT OF ROUGH REJECTION DIAMONDS FROM THE TOTAL TURNOVER IGNORING THE JUDICIAL PRONOUNCEMENT IN THE CASE OF M/S. CLASSIC DIAMONDS REPORTED IN 75 ITD 245 WHICH IS STILL IN FORCE AND ALSO THE BOARDS CIRCULAR IN F.N. 178/206 /83- 55(A-1) DATED 22.5.1984 AND SUBSEQUENT CLARIFICATIO NS ON THE ISSUE THEREOF. M/S. TWINKLE DIAMOND 4 THE APPELLANT PRAYS THAT THE ORDER OF LEARNED CIT(A ) ON THE ABOVE GROUNDS BE SET ASIDE AND THAT OF THE ASSESSIN G OFFICER RESTORED. 4. WE HAVE HEARD MR. AARSI PRASAD LEARNED DR AND M R. B.V. ZAVERI LEARNED COUNSEL FOR THE ASSESSEE. MR. ZAVERI FILED A PAPER BOOK RUNNING INTO 136 PAGES. HE ALSO FILED WRITTEN SUBMISSION JU STIFYING DECISION ON THE FIRST APPELLATE AUTHORITY. MR. PRASAD TOOK THIS BENCH THROUGH THE ASSESSMENT ORDER ORDER OF TPO AND ALSO ORDER OF LE ARNED CIT(A). WE REFER TO THE SPECIFIC ARGUMENTS MADE BY BOTH THE PARTIES AS AND WHEN NECESSARY DURING THE COURSE OF OUR FINDINGS IN THIS ORDER. MR. ZAVERI SUPPORTED THE ORDER OF THE LD.C.I.T.(A). 5. RIVAL CONTENTIONS HEARD. ON CAREFUL CONSIDERATIO N AND CIRCUMSTANCES OF THE CASE PERUSAL OF THE PAPERS ON RECORD AND ORDERS OF THE AUTHORITIES BELOW AS WELL AS CASE LAWS CITED W E HOLD AS FOLLOWS :- THE ASSESSEE HAS ADOPTED COST PLUS METHOD FOR COMP UTING ALP OF THE INTERNATIONAL TRANSACTIONS. THE TPO FOR VARIOUS REASONS CITED IN HIS ORDER HELD THAT COST PLUS METHOD IS NOT THE MOST AP PROPRIATE METHOD. THIS FINDING IS NOT CHALLENGED BY THE ASSESSEE; AND HENCE WE HAVE TO ONLY CONSIDER WHETHER THE TRANSACTION NET MARGIN M ETHOD (TNMM) ADOPTED BY THE TPO AND THE MANNER THE SAME IS APPL IED IS CORRECT OR NOT. BOTH TPO AS WELL AS THE ASSESSEE IN OUR HUMB LE OPINION HAVE COMMITTED AN ERROR IN APPLYING TNMM IN A MANNER WHE RE ENTITY LEVEL OPERATIONAL MARGIN TO SALES ARE COMPARED. SUCH METH ODOLOGY IS NOT CONTEMPLATED UNDER STATUTE. COMING TO THE ISSUE OF DETERMINATION OF ALP IT IS MANDATORY UNDER SPECIAL PROVISION STIPULATED IN CHAPTER-X OF THE IN COME TAX ACT 1961 TO COMPUTE THE ALP IN ONE OF THE METHODS SPECIFIED UND ER STATUTE. SECTION 92(1) READS AS FOLLOWS :- MEANING OF INTERNATIONAL TRANSACTION . 92B. (1) FOR THE PURPOSES OF THIS SECTION AND SECTIONS 92 92C 92D AND 92E INTERNATIONAL TRANSACTION MEANS A TRANSACTION BETWEEN TWO OR MORE M/S. TWINKLE DIAMOND 5 ASSOCIATED ENTERPRISES EITHER OR BOTH OF WHOM ARE NON-RESIDENTS IN THE NATURE OF PURCHASE SALE OR LEASE OF TANGIBLE OR IN TANGIBLE PROPERTY OR PROVISION OF SERVICES OR LENDING OR BORROWING MONE Y OR ANY OTHER TRANSACTION HAVING A BEARING ON THE PROFITS INCOME LOSSES OR ASSETS OF SUCH ENTERPRISES AND SHALL INCLUDE A MUTUAL AGREEM ENT OR ARRANGEMENT BETWEEN TWO OR MORE ASSOCIATED ENTERPRISES FOR THE ALLOCATION OR APPORTIONMENT OF OR ANY CONTRIBUTION TO ANY COST OR EXPENSE INCURRED OR TO BE INCURRED IN CONNECTION WITH A BENEFIT SERVICE O R FACILITY PROVIDED OR TO BE PROVIDED TO ANY ONE OR MORE OF SUCH ENTERPRISES. SECTION 92(C) READS AS FOLLOWS : COMPUTATION OF ARMS LENGTH PRICE . 92C. (1) THE ARMS LENGTH PRICE IN RELATION TO AN INTERN ATIONAL TRANSACTION SHALL BE DETERMINED BY ANY OF THE FOLLOWING METHODS BEING THE MOST APPROPRIATE METHOD HAVING REGARD TO THE NATURE OF TRANSACTION OR CLASS OF TRANSACTION OR CLASS OF ASSOCIATED PERSONS OR FUNCT IONS PERFORMED BY SUCH PERSONS OR SUCH OTHER RELEVANT FACTORS AS THE BOARD MAY PRESCRIBE 78 NAMELY : ( A ) COMPARABLE UNCONTROLLED PRICE METHOD; ( B ) RESALE PRICE METHOD; ( C ) COST PLUS METHOD; ( D ) PROFIT SPLIT METHOD; ( E ) TRANSACTIONAL NET MARGIN METHOD; ( F ) SUCH OTHER METHOD AS MAY BE PRESCRIBED 79 BY THE BOARD. RULE 10B READS AS FOLLOWS : DETERMINATION OF ARMS LENGTH PRICE UNDER SECTION 92C. 10B. (1) FOR THE PURPOSES OF SUB-SECTION (2) OF SECTION 92C THE ARMS LENGTH PRICE IN RELATION TO AN INTERNATIONAL TRANSA CTION SHALL BE DETERMINED BY ANY OF THE FOLLOWING METHODS BEING THE MOST APPROPRIATE METHOD IN THE FOLLOWING MANNER NAMELY . 11. PLAIN READING OF THE ABOVE PROVISIONS IN THE AC T AS WELL AS IN THE RULES SHOW THAT IT IS MANDATORY FOR THE ASSESSEE TO FOLLOW ONE OF THE PRESCRIBED METHOD AND DEMONSTRATE THAT THE INTERNAT IONAL TRANSACTIONS ENTERED INTO BY IT WITH AN ASSOCIATED ENTERPRISE ARE AT ARMS LENGTH PRICE AND SUCH EXERCISE ARE ONLY WITH REFERENCE TO A TRANSACTION OR A CLASS OF TRANSACTIONS. M/S. TWINKLE DIAMOND 6 12. COMING TO THE COMPUTATION OF ALP THE TPO AS WELL AS BY THE ASSESSEE HAVE ADOPTED ENTERPRISES LEVEL OPERATING MARGINS AS TNMM FOR THE PURPOSE OF COMPARISON. IN OUR CONSIDERED OPINIO N TRANSACTIONS NET MARGIN METHOD (TNMM) DOES NOT PERMIT THE ASSESSEE O R THE ASSESSING OFFICER TO COMPARE ENTERPRISE LEVEL PROFITS AND MA KE ADJUSTMENTS UNDER CHAPTER-X. THIS BENCH OF THE TRIBUNAL IN ITA NO. 5 034/MUM/07 DATED 15.2.2010 L BENCH IN THE CASE OF ADDL. CIT VS. M /S. TEJ DIAM AT PARAGRAPH 6 ONWARDS HELD AS FOLLOWS :- 6. RIVAL CONTENTIONS HEARD. ON A CAREFUL CONSIDERA TION OF THE FACTS AND CIRCUMSTANCES OF THE CASE AND A PERUSAL O F THE PAPERS ON RECORD AND THE ORDERS OF THE AUTHORITIES BELOW WE HOLD AS FOLLOWS. 7. THE FOLLOWING DEFINITIONS ARE EXTRACTED FOR READ Y REFERENCE : SECTION 92F(II) ARMS LENGTH PRICE: ARMS LENGTH PRICE MEANS A PRICE WHICH IS APPLIE D OR PROPOSED TO BE APPLIED IN A TRANSACTION BETWEEN PERSONS OTHER THAN ASSOCIATED ENTERPRISES IN UNCONTROLLED CONDIT IONS. (V) - TRANSACTION. TRANSACTION INCLUDES AN ARRANGEMENT U NDERSTANDING OR ACTION IN CONCERT - (A) WHETHER OR NOT SUCH ARRANGEMENT UNDERSTANDING OR A CTION IS FORMAL OR IN WRITING; OR (B) WHETHER OR NOT SUCH ARRANGEMENT UNDERSTANDING OR A CTION IS INTENDED TO BE ENFORCEABLE BY LEGAL PROCEEDING. RULE 10B SUB CLAUSE (E) TRANSACTION AT MARGIN MET HOD: M/S. TWINKLE DIAMOND 7 ( E ) TRANSACTIONAL NET MARGIN METHOD BY WHICH ( I ) THE NET PROFIT MARGIN REALISED BY THE ENTERPRISE FR OM AN INTERNATIONAL TRANSACTION ENTERED INTO WITH AN ASSOCIATED ENTERPRISE IS COMPUTED IN RELATION TO CO STS INCURRED OR SALES EFFECTED OR ASSETS EMPLOYED OR TO BE EMPLOYED BY THE ENTERPRISE OR HAVING REGARD TO ANY OTHER RELEVANT BASE; ( II ) THE NET PROFIT MARGIN REALISED BY THE ENTERPRISE OR BY AN UNRELATED ENTERPRISE FROM A COMPARABLE UNCONTROLLED TRANSACTION OR A NUMBER OF SUCH TRANSACTIONS IS COMPUTED HAVING REGARD TO THE SAME BASE; ( III ) THE NET PROFIT MARGIN REFERRED TO IN SUB-CLAUSE ( II ) ARISING IN COMPARABLE UNCONTROLLED TRANSACTIONS IS ADJUSTED TO TAKE INTO ACCOUNT THE DIFFERENCES IF ANY BETWEEN THE INTERNATIONAL TRANSACTION AND THE COMPARABLE UNCONT ROLLED TRANSACTIONS OR BETWEEN THE ENTERPRISES ENTERING I NTO SUCH TRANSACTIONS WHICH COULD MATERIALLY AFFECT THE AMO UNT OF NET PROFIT MARGIN IN THE OPEN MARKET; ( IV ) THE NET PROFIT MARGIN REALISED BY THE ENTERPRISE AND REFERRED TO IN SUB-CLAUSE ( I ) IS ESTABLISHED TO BE THE SAME AS THE NET PROFIT MARGIN REFERRED TO IN SUB-CLAUSE ( III ); ( V ) THE NET PROFIT MARGIN THUS ESTABLISHED IS THEN TA KEN INTO ACCOUNT TO ARRIVE AT AN ARMS LENGTH PRICE IN RELAT ION TO THE INTERNATIONAL TRANSACTION. 8. A PLAIN READING OF THE ABOVE SHOWS THAT TNMM REQ UIRES COMPARISON OF NET PROFIT MARGINS REALISED BY AN ENT ERPRISE FROM AN INTERNATIONAL TRANSACTION OR AN AGGREGATE O F A CLASS OF INTERNATIONAL TRANSACTIONS AND NOT COMPARISONS O F OPERATING MARGINS OF ENTERPRISES. FOR ARRIVING AT T HIS CONCLUSION WE DREW STRENGTH FROM THE DECISION OF MUMBAI L BENCH OF THE TRIBUNAL IN THE CASE OF UCB INDIA P. LTD. VS. ACIT 121 ITD 131 (MUM.) WHERE IT IS HELD THAT SECTION 92C READ WITH RULE 10B(1)(E) DEAL S WITH TRANSACTIONS NET MARGIN METHOD (TNMM) AND IT REFERS TO ONLY NET PROFIT MARGIN REALISED BY AN ENTERPRISE FR OM AN M/S. TWINKLE DIAMOND 8 INTERNATIONAL TRANSACTION OR A CLASS OF SUCH TRANSA CTION BUT NOT OPERATIONAL MARGINS OF ENTERPRISES AS A WHOLE. 6. IN VIEW OF THE ABOVE DISCUSSION WE ARE UNABLE TO SUSTAIN COMPUTATION OF ALP DONE BY THE TPO. IN OUR HUMBLE V IEW INTEREST UNNECESSARY TO GO INTO VARIOUS ISSUES RAISED BY THE ASSESSEE AS WELL AS THE ASSESSING OFFICER ON THIS ISSUE FOR THE REASON S THAT THE VERY METHOD OF APPLYING TNMM IS WRONG. THE ASSESSEE HAS NOT TAKEN THE GROUND THAT COST PL US METHOD IS THE MOST APPROPRIATE METHOD AND THE TPO HAS STRUCK DOWN THIS METHOD AS INAPPROPRIATE. UNDER THE FACTS AND CIRCUMSTANCES OF THE CASE WE HAVE NO OTHER ALTERNATIVE BUT TO SET ASIDE THE ENTIRE IS SUES TO THE FILE OF THE ASSESSING OFFICER FOR FRESH ADJUDICATION. IN VIEW O F THE PECULIAR CIRCUMSTANCES OF THIS CASE WE PERMIT THE ASSESSEE TO FILE YET ANOTHER REPORT CONTEMPLATED UNDER SECTION 92E OF THE ACT AN D ALSO SUPPORT ITS ALP UNDER ANY OTHER METHOD BY RELYING ON FRESH COMP ARABLES AND DOCUMENTS. WITH THESE OBSERVATIONS WE SET ASIDE T HE MATTER TO THE FILE OF THE ASSESSING OFFICER FOR FRESH ADJUDICATION DE NOVO IN ACCORDANCE WITH LAW AFTER GIVING THE ASSESSEE ADEQUATE OPPORTU NITY. IN THE RESULT GROUND NO. 1 OF THE REVENUE IS ALLO WED FOR STATISTICAL PURPOSES. 7. GROUND NO. 2 IS ON THE ISSUE WHETHER INTEREST ON FDRS SHOULD BE ASSESSED UNDER THE HEAD BUSINESS INCOME OR UNDER THE HEAD INCOME FROM OTHER SOURCES. THE ASSESSING OFFICER STATED I N THE ASSESSMENT ORDER THAT THE ASSESSEE HAS NOT FURNISHED ANY EXPLANATION IN RESPONSE TO HIS QUERY. ON THIS FACT AT PARAGRAPH 5 OF HIS ORDER H E HAS COME TO A CONCLUSION THAT THE INTEREST INCOME HAS TO BE ASSES SED UNDER THE HEAD INCOME FROM OTHER SOURCES. IN OUR CONSIDERED OPIN ION WHEN THE ASSESSEE HAS NOT BROUGHT OUT ANY EVIDENCE TO DEMONS TRATE THAT THE INTEREST INCOME IN QUESTION IS HAVING A NEXUS WITH BUSINESS TRANSACTION M/S. TWINKLE DIAMOND 9 IT CANNOT BE ASSESSED UNDER THE HEAD BUSINESS INCO ME. NON FURNISHING OF REQUIRED DETAILS IN OUR HUMBLE OPINION ENTITLED THE ASSESSING OFFICER TO DRAW ADVERSE INFERENCE AND TAX INTEREST INCOME U NDER THE HEAD INCOME FROM OTHER SOURCES. THUS GROUND NO. 2 OF THE REVENUE IS ALLOWED. 8. COMING TO GROUND NO. 3 THE SAME DOES NOT ARISE IN VIEW OF OUR DECISION IN GROUND NO. 2. IN ANY EVENT THE ISSUE O F NETTING IS NOW COVERED AGAINST THE ASSESSEE BY THE JUDGMENT OF HON 'BLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. ASIAN STAR CO. LTD.THU S THIS GROUND IS ALSO REJECTED. 9. COMING TO GROUND NO. 4 LEARNED CIT(A) HAS HEAVI LY RELIED ON THE DECISION OF MUMBAI BENCH OF THE TRIBUNAL IN THE CAS E OF SHEETAL MANUFACTURING CO. (SUPRA) AND DIRECTED THE ASSESSIN G OFFICER TO REDUCE TURNOVER OF ROUGH DIAMOND EXPORTED FROM THE PURCHA SES OF THE ASSESSEE AND RECOMPUTED DEDUCTION U/S. 80HHC. IN OUR CONSIDE RED OPINION DECISION OF ITAT A BENCH IN THE CASE OF SHEETAL M ANUFACTURING CO. (SUPRA) IS NOT APPLICABLE TO THE FACTS OF THIS CAS E. IN THE CASE OF SHEETAL MANUFACTURING CO. (SUPRA) DEFECTIVE DIAMONDS WERE ABOUT 0.24% OF THE TOTAL TURNOVER. THIS WAS NEGLIGIBLE. THESE WERE NOT HING BUT WASTAGE AND EQUIVALENT TO SCRAP AS PER THE FINDING OF THE TRIBU NAL. FINDING IN THAT CASE IS THAT REJECTED DIAMONDS ARE GENERATED DURING THE COURSE OF CUTTING AND POLISHINGAND HENCE BENCH HAD CONSIDERED THE SAME AS EQUIVALENT TO SCRAP. IN THE CASE ON HAND ROUGH DIAMONDS WHICH WE RE REJECTED CONSTITUTE 32.98% OF THE TOTAL TURNOVER. BY NO STRE TCH OF IMAGINATION SUCH HIGH PERCENTAGE CAN BE CALLED SCRAP WHICH HA S ARISEN OR GENERATED DURING THE COURSE OF CUTTING AND POLISHING. IN FACT LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT MARGIN EARNED BY THE AS SESSEE ON THE SALE OF EXPORT OF THIS ROUGH DIAMOND IS 1% TO 1/2%. FACTS I S THAT THE ASSESSEE EARNED A MARGIN ON THESE SALES. IN SUCH CIRCUMSTANC ES DIRECTION OF LEARNED CIT(A) TO REDUCE VALUE OF EXPORT OF ROUGH A ND REJECTED DIAMONDS FROM COST OF PURCHASE WOULD TANTAMOUNT TO INDIRECTL Y GRANTING RELIEF U/S. M/S. TWINKLE DIAMOND 10 80HHC ON THE EXPORT OF ROUGH DIAMOND THOUGH IT IS D ONE AT A PROFIT.. UNDISPUTED FACT IS THAT WHEN UNPOLISHED DIAMONDS AR E EXPORTED THE ASSESSEE IS NOT ENTITLED TO ANY RELIEF U/S. 80HHC. AS SUB CLAUSE 2(B) TO SECTION 80HHC SPECIFIES THAT THIS SECTION DOES NOT APPLY TO MINERALS AND ORES OTHER THAN PROCESSED MINERALS AND ORES SPECIF IED IN THE TWELFTH SCHEDULE. IN FACT THIS PROPOSITION IS NOT IN DISPU TE. 10. IN VIEW OF THE ABOVE DISCUSSION WE ARE OF THE CONSIDERED OPINION THAT THE ASSESSEE SHALL NOT BE ENTITLED TO REDUCTIO N FROM THE PURCHASE COST OF SALES VALUE OF ROUGH DIAMONDS EXPORTED WH ICH ARE NOT SCRAP OR SALES RETURNED. IF THEY ARE SALES RETURNS AS CLAIM ED BY THE ASSESSEE ON ACCOUNT OF REJECTION THEN THE ASSESSEE WOULD BE EN TITLED FOR REDUCTION FROM PURCHASE COST. THIS FACT THAT ROUGH DIAMONDS W ERE REJECTED AND RETURNED TO THE SAME PARTY FROM WHOM IT WAS PURCHA SED AT THE SAME COST HAS TO BE PROVED BY THE ASSESSEE FOR ENABLE IT TO GET REDUCTION FROM THE PURCHASE COST AS ONLY SUCH RETURN TO THE SELLE R AT THE SAME COST CAN BE CALLED A SALES RETURN.. SIMILARLY THE ASSESSEE IN THE CASE OF SCRAP NEEDS TO PRODUCE ADEQUATE EVIDENCE TO GET REDUCTION FROM PURCHASE CO ST. REJECTION OF CERTAIN ROUGH DIAMONDS PURCHASED AND RE- EXPORTING THEM AT A PROFIT MARGIN DOES NOT IN OUR HUMBLE OPINION ENTITLE THE ASSESSEE TO CLAIM THE SAME AS SCRAP OR PURCHASES RETURNED. WITH THESE OBSERVATIONS WE SET ASIDE THE MATTER TO THE ASSESSING OFFICER FOR FRESH ADJUDICATION IN ACCORDANCE WITH L AW. IN THE RESULT GROUND NO. 4 OF THE REVENUE IS ALL OWED FOR STATISTICAL PURPOSES. 11. IN THE RESULT APPEAL OF THE REVENUE IS ALLOWED FOR STATISTICAL PURPOSES. ORDER HAS BEEN PRONOUNCED ON 30 TH DAY OF APRIL 2010. M/S. TWINKLE DIAMOND 11 SD/- (N.V. VASUDEVAN) JUDICIAL MEMBER SD/- (J. SUDHAKAR REDDY) ACCOUNTANT MEMBER DATED : 30 TH APRIL 2010 COPY TO : 1. THE ASSESSEE 2. THE RESPONDENT 3. THE CIT(A)-CONCERNED. 4. THE CIT CONCERNED. 5. THE DR CONCERNED MUMBAI 6. GUARD FILE BY ORDER TRUE COPY ASSTT. REGISTRAR ITAT MUMBAI PS