ITAT upholds CIT(A) order for AY 2002-03, excludes duty/sales tax from turnover. No adjustment if arm's length price variation <5%. (A)

The ITAT dismissed the Revenue's appeal and upheld the CIT(A) order for the assessment year 2002-03. The ITAT affirmed the exclusion of duty and sales tax from turnover for deduction under section 80HHC, in line with the Supreme Court's decision in Laxmi Machine Tools. Additionally, certain receipts, including write back suppliers, customers, and sales tax refund, were not excluded from the deduction calculation as they impacted the business profits. The ITAT also ruled that no adjustment was necessary in the arm's length price under Transfer Pricing Regulations if the variation was less than 5%.

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Issues involved:
Appeal against CIT(A) order for assessment year 2002-03 - Exclusion of duty and sales tax from turnover for deduction u/s 80HHC - Exclusion of certain receipts while computing deduction u/s 80HHC - Reduction of arm's length price under Transfer Pricing Regulations.

Analysis:

1. Exclusion of duty and sales tax from turnover for deduction u/s 80HHC:
The Revenue contended that duty and sales tax should not be excluded from the turnover for computing deduction u/s 80HHC. However, the ITAT referred to the decision of the Hon'ble Supreme Court in the case of Laxmi Machine Tools and upheld the CIT(A) order directing the exclusion of excise duty and sales tax from the total turnover for the purpose of deduction u/s 80HHC. The ITAT dismissed ground No. 1 of the Revenue in favor of the assessee.

2. Exclusion of certain receipts while computing deduction u/s 80HHC:
Regarding the exclusion of receipts like write back suppliers, write back customers, sales tax refund, provision write back, excise duty, and tender fees while computing deduction u/s 80HHC, the ITAT agreed with the CIT(A) that these items cannot be excluded under the relevant clause of the Explanation to section 80HHC. The ITAT noted that these receipts were connected with the operations of the assessee and impacted the profits of the business. Therefore, ground No. 2 of the Revenue was dismissed in favor of the assessee.

3. Reduction of arm's length price under Transfer Pricing Regulations:
The Revenue raised a grievance against the CIT(A) directing a reduction of 5% from the arm's length price under Transfer Pricing Regulations. However, the ITAT considered the CBDT Circular on the issue and concluded that if the variation in arm's length price determined by the TPO and the assessee was less than 5%, no adjustment was necessary. Therefore, ground No. 3 of the Revenue was dismissed based on the submission made by the learned DR.

In conclusion, the ITAT dismissed the appeal of the Revenue and upheld the CIT(A) order on all the grounds presented. The judgment was pronounced on January 27, 2010, with detailed reasoning provided for each issue raised in the appeal.

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