2021 (7) TMI 750 - HC - Income Tax

High Court affirms disallowance of excess profit as deemed income, sets aside ITAT decision.

The Commissioner of Income-Tax, Pondicherry. Versus M/s. Tweezerman (India) Private Limited, Pondicherry.

The Commissioner of Income-Tax, Pondicherry. Versus M/s. Tweezerman (India) Private Limited, Pondicherry. - [2021] 437 ITR 80 (Mad) Issues Involved:1. Determination of Arm's Length Price (ALP) and the resultant excess profit.2. Close association between the assessee company and the US importing company.3. Disallowance of income from sales of scrap.4. Levy of interest under Sections 234-B, 234-C, and 234-D.5. Allowance of 5% of interest income as expenditure.6. Admissibility of revised calculation of excess profits by the assessee.7. Jurisdiction of the Assessing Officer and Transfer Pricing Officer (TPO).8. Substantial questions of law regarding the assessment and exemption under Section 10-B of the Income Tax Act.Detailed Analysis:1. Determination of Arm's Length Price (ALP) and the Resultant Excess Profit:The case centered on the determination of the ALP for the assessee's export transactions with its associated enterprise in the US. The Assessing Officer, based on the TPO's report, restricted the deduction claimed under Section 10-B by disallowing Rs. 3.54 Crores as excess profit, treating it as deemed income under 'Other Sources.' The Commissioner of Income Tax (Appeals) (CIT(A)) partially upheld this, directing the Assessing Officer to determine the net profit considering the 83.1% profit margin. The Income Tax Appellate Tribunal (ITAT) deleted the reduction of eligible profits, terming the profits as 'ordinary,' which was challenged by the Revenue.2. Close Association Between the Assessee Company and the US Importing Company:The Revenue argued that the close connection between the assessee and the US company (common shareholder holding significant equity in both) led to an arrangement to inflate profits and avoid taxes. The CIT(A) accepted this close connection and the resultant high profit margin. However, the ITAT did not address this aspect comprehensively, focusing instead on the jurisdiction and methodology of the Assessing Officer.3. Disallowance of Income from Sales of Scrap:The Assessing Officer excluded the value of scrap sales from business profits, which was contested by the assessee. The ITAT struck down this disallowance, considering it as business income entitled to deduction under Section 10-B.4. Levy of Interest Under Sections 234-B, 234-C, and 234-D:The CIT(A) rejected the assessee's plea regarding the charging of interest under these sections. The ITAT did not specifically address this issue, focusing on the primary contention of excess profit and ALP determination.5. Allowance of 5% of Interest Income as Expenditure:The CIT(A) allowed 5% of the interest income from the bank as expenses to earn the interest income assessed under 'Other Sources.' The ITAT struck down this decision, aligning with the Revenue's appeal.6. Admissibility of Revised Calculation of Excess Profits by the Assessee:The assessee's revised calculation, claiming an error in the initial admission of Rs. 3.54 Crores as excess profit, was rejected by the Assessing Officer and CIT(A) as an 'afterthought.' The ITAT accepted the revised calculation, which was contested by the Revenue.7. Jurisdiction of the Assessing Officer and Transfer Pricing Officer (TPO):The ITAT held that the Assessing Officer failed to substantiate the basis of excess profit and relied on erroneous calculations. The CIT(A) supported the Assessing Officer's reference to the TPO and the resultant findings, emphasizing the fairness in restricting the disallowance to Rs. 3.54 Crores.8. Substantial Questions of Law Regarding the Assessment and Exemption Under Section 10-B:The High Court addressed several substantial questions of law, primarily focusing on whether the ITAT was right in allowing the exemption under Section 10-B despite the findings of the TPO and Assessing Officer. The Court upheld the CIT(A)'s order confirming the Assessing Officer's determination of excess profit and set aside the ITAT's deletion of the disallowance.Conclusion:The High Court restored the order of the Assessing Officer, confirming the disallowance of Rs. 3.54 Crores as excess profit and treating it as deemed income under 'Other Sources.' The ITAT's order was set aside on this count, while the disallowance of 5% of interest income and the inclusion of scrap sales as business income were upheld. The appeals filed by the Revenue were allowed, and the substantial questions of law were answered in favor of the Revenue.