2014 (4) TMI 776 - AT - Income Tax

Tribunal Upholds Transfer Pricing in Profit Allocation Dispute, Emphasizes Market Value & Section 80IA/80IB

M/s. Ivax Paper Chemicals Ltd. Versus The Addl. CIT Range-8, Hyderabad

M/s. Ivax Paper Chemicals Ltd. Versus The Addl. CIT Range-8, Hyderabad - TMI Issues Involved:1. Transfer Pricing and Profit Allocation2. Jurisdiction under Section 80IA(10) and 80IB(4)3. Treatment of Central Excise RefundIssue-wise Detailed Analysis:1. Transfer Pricing and Profit Allocation:The assessee, a company engaged in manufacturing and production of chemicals, maintained separate books for its three units: Kallakal, Kanchipuram, and Kathua. The Assessing Officer (AO) suspected that profits were being shifted from non-exempt units to the tax-exempt Kathua unit by transferring finished goods/raw materials. The AO concluded that finished goods worth Rs. 4,11,14,262 were transferred from Kallakal to Kathua, resulting in higher profits for Kathua. The AO redrew the profit and loss accounts of all three units by proportionately distributing expenses based on turnover, which led to a recalculated profit for Kathua and a reduced exemption under section 80IB.The assessee contended that the transferred materials were raw materials/intermediaries used for producing finished products at Kathua and provided factory records to support this. They argued that higher profits at Kathua were due to it being a new unit with benefits like power subsidy and savings in transportation costs. The CIT(A) partially accepted the assessee's contention, directing the AO to exclude purchases from the prorated expenditure and treat excise refund as a capital receipt.2. Jurisdiction under Section 80IA(10) and 80IB(4):The assessee argued that the AO's assumption of jurisdiction under section 80IA(10) was illegal, as it applies to transactions between an eligible business and a third person, not between different units of the same enterprise. The AO justified the redrawing of accounts under section 80IA(8), which allows recomputation of profits if the transfer price does not correspond to market value. The AO found anomalies in expenditure booking and concluded that the transactions were arranged to inflate Kathua's profits. The Tribunal upheld the AO's recomputation, noting that the price charged by Kallakal to Kathua should reflect market value.3. Treatment of Central Excise Refund:The AO treated the PLA refund of Rs. 1.09 crores as income from other sources, not considering it for section 80IB deduction. The CIT(A) directed the AO to treat the excise refund as a capital receipt, referencing the Tribunal's decision in ACIT vs. Asian Brown Boweri Ltd., which was reversed by the jurisdictional High Court. The CIT(A) concluded that the excise refund did not have a first-degree nexus with operational profits derived from the industrial undertaking, thus not eligible for section 80IB deduction.Conclusion:The Tribunal dismissed the assessee's appeal, upholding the AO's recomputation of profits and treatment of the excise refund. The Tribunal also dismissed the Revenue's appeal, confirming the CIT(A)'s exclusion of purchases from prorated expenditure and treatment of the excise refund as a capital receipt. The judgment emphasized the importance of market value in inter-unit transactions and the correct application of section 80IA/80IB provisions.