TaxTMI 
TaxTMI 
2010 (2) TMI 810
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....26/- under section 80-IB. While scrutinizing the return, the Assessing Officer noticed that there was another partnership firm by name M/s Cello Sales and Marketing (hereinafter referred to either as CSM or marketing arm). This partnership firm had been established on 01.04.2001 to market the products manufactured by the Cello Group of concerns which were in existence at that time, namely, M/s Cello Pens and Stationery Private Limited, M/s Cello Plastic Products and M/s Cello Writing Instruments Private Limited. All these three concerns were found to have been enjoying deduction under section 80-IA. The assessee had also arranged that its products would be marketed through CSM. In other words, CSM which was the marketing arm of the other three concerns of the Cello Group was also appointed as the marketing arm of the assessee, after the assessee was created. The Assessing Officer noticed that CSM was also controlled by members of the Cello Group. He accordingly invoked the provisions of section 80- IA(10) which was made applicable to section 80-IB, by sub-section (13) of section 80-IB. Section 80-IA(10) empowered the Assessing Officer to regulate the deduction claimed by an assesse....
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....profit ranging between 7% to 12%. He also noted that CSM was claiming almost 98.24% as expenses on sales, marketing and administrative heads out of its total expenses which was quite high for a marketing company; whereas the assessee which was the manufacturing company did not incur any expenses except travelling and conveyance expenses of Rs.62,298/-. The Assessing Officer also compared the net profit earned by M/s Gautam Industries (Proprietor: Ms Seema Prabhudesai) with that of the assessee and found that the former earned a net profit of only 6.63% after debiting all the administrative and marketing expenses in its Profit and Loss Account. After narrating these facts and comparing the assessee's case with the cases mentioned above, the Assessing Officer estimated the assessee's net profit at 27.92% by taking the average of the net profit of 55.67% earned by the assessee firm and 0.17% earned by CSM. The aggregate came to 55.84%, which divided by 2 gave the average of 27.92%. Since the total sales of the assessee for the year amounted to Rs.15,12,05,778/-, on which net profit of 55.67% came to Rs.8,41,84,226/-, the turnover itself was bifurcated between 27.92% and 27.75% and thi....
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....o group. (e) It is necessary to compare the financial results of the assessee with other cases on the assumption that no marketing arm had been floated. If no marketing arm had been floated, the assessee and the other manufacturing concerns of the group would have sold their products directly to the stockiest at a price at which the marketing arm actually sold the goods to them and would have also incurred all the expenses which the marketing arm actually incurred. The result would be that the profit of the manufacturing concerns would have been higher by the amount of profit actually earned by the marketing arm. (f) Thus, all the manufacturing concerns of the group, including the assessee, would have claimed deduction under section 80-IB on such higher amounts of profits. In other words, what the CIT(A) has suggested is to imagine a state of affairs where there was no CSM and has proceeded to hold that in such a case the profits made by CSM would have been earned by the assessee firm, which would have added to its profits from the manufacturing activity and thus there would have been higher profits shown by the assessee for purposes of deduction under section 80-IB....
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.... other person, or for any other reason, the course of business between them is so arranged that the business transacted between them produces more profits to the assessee than ordinary profits and this can happen only if the assessee sells goods to the other entity at an artificially inflated price; and [b] even on merits the profits earned by the assessee were not extra ordinarily high so as to justify the reduction of the claim under section 80-IB. In support of the submission [b], the learned counsel for the assessee took us through the Paper Book and the findings recorded by the Assessing Officer and sought to demonstrate that they were wrong. 8. So far as the submission [a] is concerned, it can be taken up later, if necessary, because in our view submission [b] has merit and requires to be accepted for the following reasons:- We have already seen that CSM was formed on 01.04.2001 whereas the assessee came into existence subsequently in March 2004. It cannot therefore be said that the marketing arm was created only to enable the assessee to shift its expenses to the marketing arm. Even if it is argued that this may not be conclusive and that even though the assessee fir....
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.... perusal thereof shows that the assessee firm has incurred the normal expenses which any manufacturing concern would incur. Apart from raw materials and packing materials consumed, the manufacturing expenses includes wages, carriage inward, production incentive, labour payments such as provident fund, HRA, labour welfare expenditure, bonus, etc. There are also power and water charges, carriage outward, loading and unloading charges, etc. Schedule "L" shows administrative, selling and distribution expenses and in fact also includes sales promotion expenses of Rs.46,92,370/-. The claim of depreciation as per Schedule "B" shows the existence of plant and machinery, tools and equipments, electrical installation, furniture and fixtures, etc. All these figures of expenses debited in the assessee's accounts for the year under appeal show that the conclusion of the Assessing Officer that the assessee did not incur any expenditure other than travelling and conveyance expenses is baseless. 10. A look at the Profit and Loss Account of CSM for the year ended 31.03.2005 shows that it has incurred the usual expenses which any marketing organization would incur. For instance, it has paid ....
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....e of 0.17%. It cannot be considered to be abnormally low. 13. Turning to the comparable cases given by the Assessing Officer, it is seen that so far as M/s Todays Writing Products Limited is concerned, cited in the assessment order, which has shown net profit rate of 7% to 12% as per the unaudited financial results published in the Economic Times for the year ended 31.03.2007, it is not known as to what is the stature of that company in the writing instruments market so that it can stand the test of comparison. The assessee group, it is stated before us, enjoys 38% share in the writing instruments and stationery market and thus has a very high brand value and goodwill. Its stature in the market is very high and obviously therefore the figures cannot be compared with those of M/s Todays Writing Products Limited. It is also seen that this company is also having trading activities and, therefore, the product mix is not known and this also makes the comparison difficult. As regards the case of M/s Gautam Industries cited in the assessment order, there are absolutely no details from which it can be known as to whether it is a comparable case at all. We do not have the details of....