AI Drafter 
TaxTMI 
TaxTMI 
2010 (12) TMI 1225
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....d on facts in confirming the action of AO in adding Rs. 69,50,182/- on account of inflation of purchase of raw material. Under the facts and circumstances of the case no such addition is required to be made and the same deserves to be deleted. 2. The learned CIT(A) has erred in law and on facts in confirming the action of AO in adding Rs. 58,73,469/- u/s 69 of the Act on account of unexplained investment in the purchase of raw materials. Under the facts and circumstances of the case no such addition is required to be made and the same deserves to be deleted. 3. Alternatively and without prejudice the alleged unexplained investment in purchases as well as alleged inflation in purchases may kindly be treated as income under head "Business Income" and not under the head 'income from other sources'. 4. Alternatively and without prejudice, ld. CIT(A) has erred in law and on facts in adding both the deficit in consumption of some of the raw materials as also the excess in consumption of some of the raw materials compared to Standard Input Output Norms prescribed by the Government of India for quantifying the export benefits given to exporters. 5. Alter....
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....entioned by the appellant. As there was lot of variation in the ratio, to know the exact consumption of the raw material the statement of the General Manager (Works) namely Shri R. S. Sharma who is the in--charge of production was recorded. As he was the in-charge of production his statement would determine the actual consumption of various raw material for the production of particular medicine. The statement has been reproduced in the assessment order on page 10& 11. He has categorically stated in reply to various questions which have been put-up by the AO that the consumption of raw materials is exactly in accordance to the input output ratio prescribed by the Government and printed in the sale invoices. In reply to question No.5, 6, and 8 he has categorically mentioned that the production of export items is as per the standard norms and these inputs are also mentioned at the bottom of export sales invoice. In reply to question No.8 he has again confirmed that production of the item is as per the standard norms and the inputs are used as per the standard usage mentioned at the bottom of sales bills. If there would have been any variation in the consumption of raw material he woul....
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....he consumption has been different because of factors mentioned by it. The fact remains that the appellant has not been in a position to explain the deficiency and the alleged extra consumption of raw material vis-à-vis the standard input output ratio in view of the statement of the production manager who has strictly confirmed that the raw material has been consumed as per standard input output ratio." On these facts, the CIT(A) finally enhanced the addition vide para 2.2.3, by observing as under:- "2.2.3 From the facts on record and the above discussion, it is clear that the appellant had shown less consumption of certain input raw material of Rs. 63,04,605/- and the only inference is the same have been purchased from outside the books of account and the same is liable to be added as the investment from undisclosed sources and the appellant has shown more consumption of certain items to the extent of Rs. 1,32,57,449/- which has not been consumed and therefore, the purchased. Thus the total addition which is liable to be made is Rs. 1,95,62,054/-. After considering the addition of Rs. 89,10,074/-, the income which is to be further enhanced is Rs. 1,06,51,33....
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....ied to distinguish this issue, but nothing new was argued. 4. As the facts are exactly identical in the present year as was in earlier year as admitted by both the sides, taking a consistent view as in earlier year, we allow the claim of the assessee and this issue of the assessee's appeal is allowed." 4. We find that the facts are exactly identical in the present year as was in earlier year as admitted by both the sides, taking a consistent view as in earlier year, we allow the claim of the assessee and this issue of the assessee's appeal is allowed. 5. The next issue in this appeal of the assessee is as regards to exclusion of 90% of interest income while quantifying business profits u/s.80HHC of the Act at Rs. 1,89,975/-. For this assessee has raised the ground No.9 & 10 as under:- "9. The learned CIT(A) has erred in law and on facts in confirming the action of AO in excluding 90% of the interest income amounting to Rs. 61,864/- from the profits of the business while quantifying deduction u/s.80HHC of the Act. 10. Alternatively and without prejudice, if the interest income is to be excluded, corresponding expenditure incurred to earn such interes....
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....for the purposes of availing of credit facilities from the bank, does not have an immediate nexus with the export business and therefore has to necessarily be treated as income from other sources and not business income. However, this will apply only where there is a specific finding by the Assessing Officer that the interest income is not business income. If in a given case the Assessing Officer has held that the interest income is business income, and this has not been challenged by the Department thereafter'/ that question cannot to be permitted to be reopened and the only question then will be if netting should be allowed. Clause (baa) of the Explanation to section 80HHC envisages a two-step process in computing profits derived from exports, first, the Assessing Officer is required to apply sections 28 to 44 in order to compute the profits and gains of business or profession. In doing so, the Assessing Officer may find that certain incomes, which have no nexus to the export business of the assessee, are not allowable and therefore ought to be treated as income from other sources. Once the Assessing Officer computes what is business income then he proceeds to the ne....
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....see in earning such interest. To summarize the conclusions : (i) In computing what the profits derived from exports for the purposes of section 80HHC(1) read with section SOHHC(3) are, the nexus test has to be applied to exclude that which does not I partake of profits that can be said to have been derived from the business of exports, (ii) In the specific context of clause (baa) of the Explanation to section 80HHC, while determining the "profits of the business", the Assessing I Officer has to undertake a two-step exercise in the following sequence. He has I to first "compute" the profits of the business under the head "Profits and gains of business or profession." In other words, he will have to compute business profits, in terms of the Act, by applying the provisions of sections 28 to 44 thereof. (iii) In arriving at the profits of the business by the above method, the Assessing Officer will exclude all such incomes which partake of the char-I Jeter of "income from other sources" which in any event are treated under I sections 56 and 57 of the Act and are therefore not to be reckoned for the purposes of section 80HHC. (iv) Where surplus funds ....
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....y the assessee for application of the netting principle. Rani paliwal v. CIT [2004] 268ITR 220 (P & H) dissented from. " Respect fully following the aforesaid decisions, we restore the issue to the f i le of the AO to decide the same as per the above decision. This issue of the assessee's appeal is al lowed for stat ist ical purposes. 7. The next issue in this appeal of assessee is against the order of CIT(A) confirming the exclusion of 90% of income from sale of advance license for computation of deduction u/s 80HHC of the Act. For this, assessee has raised the following ground No.11 & 12:- "11. The learned CIT(A) has erred in law and on facts in confirming the action of AO in excluding 90% of the income from sale of advance license amounting to Rs. 5,19,709/- from the profits of the business while quantifying deduction u/s.80HHC of the Act. 12. Alternatively and without prejudice, only profit on sale of advance license may kindly be excluded." 8. We find that this issue of income from sale of advance licence has been set aside to the file of Assessing Officer by giving following findings in para-7 & 8 of assessee's own appeal in ITA No.519/Ahd/....
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....entire business profit without differentiating between units engaged in export and units engaged in domestic sales. 14. The learned CIT(A) has erred in law and on facts in confirming the action of AO in not granting deduction u/s.80HHC on unite wise turnover. The learned CIT(A) erred in confirming the action of AO in calculating deduction u/s 80HHC on the entire business turnover without differentiating between units engaged in export and EOU units. 15. Both the lower authorities have erred in law and on facts in not properly appreciating and considering various submissions, evidence and supporting placed on record during the course of the assessment proceedings and not properly appreciating various facts and law in its proper perspective and further erred in passing orders in gross violation of the principles of natural justice." 10. After hearing the rival contentions we find that CIT(A) has denied the claim by stating that assessee is engaged in the same type of export business in all the units and for the purpose of computation of deduction u/s.80HHC of the Act, the profit and turnover of both the units having export business should be considered. The CIT(A....
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....of order received from Addl. Commissioner of Income-tax (Transfer Pricing-III), Mumbai." 14. The Ld. counsel for the assessee before us stated that identical addition was deleted by CIT(A) for assessment year 2003-04 on identical facts and Revenue accepted the decision of the CIT(A). He filed copy of CIT(A)'s order in CIT(A) XIV/ACIT C No. 88/2006-07 dated 15-12-2006 and further the Tribunal in ITA No.554/Ahd/2006 in assessment year 2002-03 dated 15-02-2008 accepted the TNMM method followed by assessee on account of method of Arms Length Price and rejected the CUP Methods adopted by Assessing Officer. The assessee narrated the facts that PBIT of 16.67% is very much comparable and better than the industry average of 13.33%. Even margins with AE at 18% are better than overall PBIT. The assessee stated that the average sales price of Cadila Pharma is at Rs. 162 per kg. which is way lower than the average sales price of Rs. 172 per kg charged by the assessee. The assessee further stated that the average sales price of Cadila and Vipor is at Rs. 175/- per kg. whereas the average sales price of the assessee is at Rs. 172/-. The difference of Rs. 3/- on total sales price of Rs. 172 is ....
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....(e.g. costs, sales, assets) that a taxpayer realizes from a controlled transaction (for transactions that are appropriate to aggregate under the principles of Chapter I). Thus, a transactional net margin method operates in a manner similar to the cost plus and resale price methods. This similarity means that in order to be applied reliably, the transactional net margin method must be applied in a manner consistent with the manner in which the resale price or cost plus method is applied. This means in particular that the net margin of the taxpayer from the controlled transaction (or transactions that are appropriate to aggregate under the principles of Chapter I) should ideally be established by reference to the net margin that the same taxpayer earns in comparable uncontrolled transactions." Where this is not possible, the net margin that would have been earned in comparable transactions by an independent enterprise may serve as a guide, A functional analysis of the associated enterprise and, in the latter case, the independent enterprise is required to determine whether the transactions are comparable and what adjustments may be necessary to obtain reliable results. Further, the o....
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....s required in a manner of aspects of the associated enterprise and the independent enterprise involved in the transactions in order for the controlled transactions to be comparable; there are various factors other than products and functions that can significantly influence net margins. 3.40 Another important aspect of comparability is measurement consistency. The net margins must be measured consistently between the associated enterprise and the independent enterprise. In addition, there may be differences in the treatment across enterprises of operating expenses and non-operating expenses affecting the net margins such as depreciation and reserves or provisions that would need to be accounted for in order to achieve reliable comparability." In view of the above guidelines and the facts of the present case, it is clear that the "Transactional Net Margin Method" (TNM Method) as understood by us and as per Rule 10B(1)(e) of IT Rules, the application of correct TNM Method for computing net margins of the similar Transactions relating to the product of the assessee-company were to be taken into consideration and benchmark of net margin determined from comparable unco....
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....or the differences. Similarly, in the present case also, the PBIT of the assessee-company is exactly similar or nearby with that of the other uncontrolled transactions of unconnected enterprises. The PBIT of exports "is as high as 23.02% as against the overall PBIT of the assessee-company was at 20.04% and the transactions of the export the assessee-company was more than 92% of the exports having been made to the AE resulted into more PBIT for the assessee than other transactions. Even the assessee has compared the PBIT of other independent entities with that of the assessee and demonstrated the application of TNM method correctly: Accordingly, we uphold the TNM method adopted by the assessee and reverse the CUP method adopted by the Revenue. Accordingly, this issue of the assessee's appeal is allowed." We find that, the facts being exactly identical in the present year, uphold the order of CIT(A) and this issue of Revenue's appeal is dismissed. 16. The next issue in this appeal of Revenue is against the order of CIT(A) in deleting the addition made by Assessing Officer on account of disallowance of interest expenditure u/s.36(1)(iii) of the Act. For this, Revenue has rai....
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....case, the assessee appears to have derived considerable benefit under the terms of agreement, in as much as it could obtain office space in a prestigious locality, at low rates inclusive of maintenance and service charges. The usage of the premises was, therefore, virtually rent free. Instead of paying rent monthly at market rates which were higher, the assessee has allowed use of its funds for earning interest by ASPL in lieu of usage of office space. Further, the assessee retained the option of converting the lease into purchase of the office premises. It thus had the right of first refusal on sale of the impugned property. These are considerable commercial advantages. It may be disputed whether the commercial advantage derived was commensurate to the loss on account of foregone usage of the funds in question. If, however, some nexus of business expediency could be shown, then the business should be allowed to e the best judge of his own interest. Following the ratio of the Supreme Court's decision in S.A. Builders Ltd., I am of the opinion that the disallowance of interest amounting to Rs. 5,79,717/- was not justified, and is, accordingly, directed to be deleted." 18....
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....been considered by the Hon'ble Delhi High Court in the case of CIT v. P.M. Electronics Ltd. (2008) 220 CTR 635 (Del), wherein the Hon'ble Delhi High Court has discussed in para-4 as under:- "4. On 27th Nov., 1998 the assessee had filed a return of income declaring a loss of Rs. 8,92,888. On 11th May, 1999 the return was processed under s. 143(1)(a) of the Act. The case of the assessee was selected for scrutiny. Accordingly, a notice dt. 27th Sept., 1999 under s. 143(2) of the Act was issued to the assessee. In response to the notice and on examination of the details submitted by the assessee with respect to provident fund payments made both on account of employer's and employees' share revealed that payments in the sum of Rs. 17,94,042 were late as per the provisions of s. 36(1)(va) r.w s. 2(24)(x) and s. 43B. Consequently, the AO disallowed the deduction and added a sum of Rs. 17,94,042 towards EPF contribution." And subsequently decide this issue in para-10 to 14 of Hon'ble Delhi High Court, which read as under:- "10. In view of the above, it is quite evident that the special leave petition was dismissed by a speaking order and while doing so the ....