2010 (4) TMI 892 - AT - Income Tax

Ruling partly allows taxpayer, deletes Rs.3.54 crore reduction under s.80-IA(10)/s.10B(7); scrap sales nondeductible; ad hoc 5% interest deduction disallowed

ITAT (Chennai) allowed the taxpayer's appeal partly by deleting the AO's reduction of eligible 10B profits by Rs.3.54 crore under s.80-IA(10)/s.10B(7), ... Denying deduction u/s. 10B of the profits in excess of the Arm's Length Price (ALP) by invoking the provisions of s. 10B(7) r/w s. 80-IA(10) - Nature of income from scrap sales - Allowance of 5% expenditure on interest income - Held that:- In the present case the TPO has categorically given a finding that the income of the assessee is at the arm’s length. One must keep in mind that the intention of transfer pricing is also on similar lines as s. 80-IA(10) insofar as under the provisions of transfer pricing it is to verify as to whether the local AE is getting its right share of revenue and as per s. 80-IA(10), it is to verify and adjust the profits of an eligible business so that under the garb of the eligible business the taxable income of an AE is not reduced by shifting its income to the eligible business. However, he has given a further fact in his order that the profit level indicator of the assessee is higher than the mean of the profit level indicator of the comparable cases. The assessee has been right from the beginning claiming that M/s Rahul Electricals & Electronics, which showed a low ratio of profit before tax to sales was not a comparable. This has not been refuted by either the TPO or the AO. In fact, with the comparable, which the assessee itself is pointing out being a sister-concern of the assessee showed the ratio of the PBT to sales at 90.1 per cent, if M/s Rahul Electricals & Electronics is being considered as comparable and had shown a PBT to sales at 7.3 per cent, has the TPO taken any action under transfer pricing against M/s Rahul Electricals & Electronics has also not been placed before us. The provisions of s. 80-IA(10) do not give an arbitrary power to the AO to fix the profits of the assessee. The AO has to specify as to why he feels that the profits of the assessee are being shown at a higher figure, which he has done by alleging the close proximity between the assessee and the USA company with whom the assessee is transacting. He has further to show as to how he has computed the ordinary profits which he deems to be the ordinary profits which the assessee might be expected to generate. Comparing the assessee’s modus operandi of conducting its business with another when the same are not of equal terms would be a travesty of justice insofar as the financial charges, the use of the plant and machinery, the depreciation thereon, the location which would affect the cost of transportation as also the cost of the labour, cost of power and fuel would have to be seen. The fact that the AO has also not shown any calculation on the basis of which he has determined Rs. 3.54 crores is the excess profit received by the assessee cannot stand in view of the fact that he has not shown as to what he feels is the actual ordinary profit which the assessee could have generated nor has he shown any particulars he has used for arriving at such a figure especially when the assessee himself has filed the calculation showing the error in the difference between the profits and the ALP as filed before the TPO. Thus, we are of the view that the reduction of the eligible profits of the assessee by an amount of Rs. 3.54 crores as done by the AO by invoking the provisions of s. 80-IA(10) r/w s. 10B(7) of the Act is unsustainable and consequently the same is deleted in toto. Income from the scrap sales as business income, it is noticed that as per the provisions of s. 10B, it is the profits and gains derived by the assessee from a 100 per cent export oriented undertaking that are eligible for deduction. The sale of scrap is not profit and gain derived by the assessee from the 100 per cent export oriented undertaking. The sale of scrap is not an export and on that ground itself the assessee is not entitled to relief. Further while filing its return of income, the assessee itself has treated the income from the sale of scrap as income from other sources. It is not open to the assessee to modify its stand in its return in the course of assessment proceedings other than by filing a revised return as held by the Hon’ble Supreme Court in the case of Goetze (India) Ltd. [2006 (3) TMI 75 - SUPREME COURT]. Thus, the findings of the learned CIT(A) stand confirmed. In the result, the appeal of the assessee is partly allowed. Allowance of 5% expenditure on interest income - In the absence of any expenditure having been incurred the Act does not provide for any ad hoc estimated expenditure. This is because the income of the assessee itself is assessed as per the books of account maintained by the assessee, wherein all the expenditure have been claimed. Thus, we are of the view that no expenditure is liable to be allowed. Even otherwise, as per the provisions of s. 57(iii), as the assessee has not been able to point out any expenditure which has been laid out or expended wholly or exclusively for the purpose of making or earning such interest income from the bank, no ad hoc expenditure is allowable. Thus, the findings of the learned CIT(A) stand reversed and the Revenue is allowed. Accordingly, the appeal of the Revenue is partly allowed. Issues Involved:1. Denial of deduction under Section 10B for profits in excess of the Arm's Length Price (ALP).2. Treatment of income from scrap sales.3. Levy of interest under Sections 234B, 234C, and 234D.4. Allowance of 5% expenditure on interest income.Detailed Analysis:1. Denial of Deduction under Section 10B for Profits in Excess of ALP:The assessee contested the CIT(A)'s decision to uphold the AO's denial of deduction under Section 10B for profits exceeding the ALP by invoking Section 10B(7) read with Section 80-IA(10). The AO had referred the case to the TPO due to foreign transactions, and the TPO found no need for adjustments to the international transaction values. However, the TPO noted that the assessee's Profit Level Indicator (PLI) was significantly higher than the mean PLI of comparable companies. The AO adopted the assessee's working of excess profit at Rs. 3.54 crores and reduced this from the eligible profit for deduction under Section 10B, assessing it under 'Income from other sources.' The CIT(A) partially upheld this by reducing only 83.1% of Rs. 3.54 crores from the eligible profit.The Tribunal found that the TPO had confirmed the ALP and no adjustment was necessary. The AO's application of Section 80-IA(10) was deemed unsustainable as he failed to specify why he believed the profits were inflated and did not provide a basis for determining ordinary profits. The Tribunal deleted the reduction of Rs. 3.54 crores from the eligible profits.2. Treatment of Income from Scrap Sales:The assessee argued that income from scrap sales should be considered business income eligible for deduction under Section 10B. The AO and CIT(A) treated scrap sales as 'Income from other sources,' and the Tribunal upheld this view. It was noted that scrap sales do not qualify as profits derived from a 100% export-oriented undertaking, and the assessee had originally classified this income under 'Income from other sources' in its return. The Tribunal confirmed the CIT(A)'s findings, disallowing the deduction under Section 10B for scrap sales.3. Levy of Interest under Sections 234B, 234C, and 234D:The Tribunal noted that the levy of interest under Sections 234B, 234C, and 234D is consequential in nature. No substantial arguments were presented on this issue, and the Tribunal confirmed the CIT(A)'s findings.4. Allowance of 5% Expenditure on Interest Income:The Revenue appealed against the CIT(A)'s direction to allow 5% of the interest income as expenditure. The Departmental Representative argued that the assessee did not provide evidence of incurring such expenditure and had already claimed all expenses in computing business income. The Tribunal found merit in this argument, noting that the Act does not provide for ad hoc estimated expenditure without evidence. Consequently, the Tribunal reversed the CIT(A)'s decision and disallowed the 5% expenditure on interest income.Conclusion:The Tribunal partly allowed the appeals of both the assessee and the Revenue. The reduction of Rs. 3.54 crores from the eligible profits under Section 10B was deleted, the treatment of scrap sales as 'Income from other sources' was upheld, and the allowance of 5% expenditure on interest income was disallowed. The levy of interest under Sections 234B, 234C, and 234D was confirmed as consequential.