TaxTMI 
TaxTMI 
2017 (6) TMI 1112
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....essee.'' 2.1 Apropos Ground No. 1 and 2 of the assessee, the facts as emerges from the order of the ld. CIT(A) is as under:- '' I have perused the facts of the case, the assessment order and the submissions of the appellant. The facts of the case are that the assessee during the year was in trading and manufacturing of electrical bulb and CFL and their components. On a turnover of Rs. 85,85,52,789/- a gross profit of 47.33% was declared against 45.03% declared in the previous year. During the year, the assessee claimed a deduction of Rs. 36,15,771/- u/s 80IC of the I.T. Act, 1961. The AO examined the books of accounts, audit reports alongwith profit and loss account and copis of books of account of the assessee firm and its sister concern, M/s. Fairdeals which deals in the same business i.e. trading and manufacturing of electric bulbs, CFL, LED lights and other components. Importantly, it has noticed that during the year under consideration, the assessee firm purchased almost 65% of raw material from its sister concern and all finished goods were sold to the sister concern. The sister concern has shown net profit of 0.094% on a turnover of Rs. 4.4 crores while assessee ....
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.... rates to the sister concern and the other concerns. It is seen that these details do not present comparable cases where prices are compared the quantities are vastly different for e.g. 8100 number of printed circuit boards are being compared with the transaction for Rs. 52,560/- boards. Similarly, the months of transaction are different and in such situation it cannot be given much credence. The two concerns deal in similar products, the partners and management in both the concerns are same, there are transactions of sale and purchase and in fact in the year under consideration entire sale is to the sister concern as it was submitted that assessee company stopped production after this year. The sale price is also not comparable as goods sold are at various stages of completion and it is not possible to verify the correction of the valuation. The wide difference in net profit at 43.50% and 0.095%does not get explained by factors pointed out by the authorized representative and discussed by me above. In view of the same, provisions of section 80IA(10) are applicable. Now coming to the percentage of profits which can reasonably be said to be derived from the eligible business, after ....
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....acturing of the LED bulb by the Baddi Unit i.e. in A.Y. 2011-12, the Baddi unit declared a gross profit rate of 55.74% on turnover of Rs. 66,17,314/-. In this year, the Baddi unit purchased raw material of Rs. 15,04,194/-, from its associate concern M/s Fairdeals out of the total raw material of Rs. 34,49,774/- purchased by it which constituted 43.60% of the total purchases. The raw material purchased by it from M/s Fairdeals is comparable with the rate at which it was purchased from the other parties as per details placed at PB 9-12. The sales made in this year to M/s Fairdeals was Rs. 15,03,778/- out of total sales of Rs. 66,17,314/- which constituted 22.72 % of the total sales. From the details of sales placed at PB 13, it can be noted that the Baddi unit has sold the goods to non associate concern namely Indo Asian Fusegear Ltd. @ Rs. 25.48 per bulb and HPL Electric and Power Pvt. Ltd. @ Rs. 22.77 per bulb giving an average rate of Rs. 24.12 per bulb whereas the same goods has been sold to M/s Fairdeals @ Rs. 22 to Rs. 23 per bulb. From these details it is evident that in A.Y. 2011-12 the goods purchased from/sold to M/s Fairdeal was at a market rate and in that year the gross ....
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....of purchase from M/s Fairdeals is different than the date of purchase from the other parties. However, he has not brought any evidence on record to prove that the rate at which the assessee purchased the goods from M/s Fairdeals on a particular date was lower. Therefore it can't be concluded that M/s Fairdeals has shifted its profit to the assessee for claiming higher deduction u/s 80IC. (iii) The assessee has sold the entire goods during the year to M/s Fairdeals. The sale is of raw material, semi-finished goods and finished goods. The detail of sales is placed at PB 15 was submitted to the AO.From the same it can be noted that assessee has sold the unconsumed raw material of Rs. 81,291/- to M/s Fairdeals at the same rate at which it was purchased from M/s Fairdeals. This fact has been accepted by the AO himself. The assessee sold finished goods of Rs. 9,36,353/- (LED light) @ Rs. 23 per bulb which is at the same rate at which it was sold in the last year and was comparable to the rate at which it was sold to other parties.The remaining sales of Rs. 75,33,145/- is of semi-finished goods. The same is sold at different rate depending upon the stage of completion. For exampl....
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....ssessee and M/s Fairdeals at 7.12% and applied such N.P. rate to the turnover of the assessee, thereby estimating the net profit of the assessee at Rs. 6,08,816/- as against Rs. 36,15,771/- declared by the assessee and thereby disallowed the claim of deduction u/s 80IC at Rs. 30,06,955/-. The entire working made by the AO is incorrect. This is for the reason that firstly M/s Fairdeals does not deal in LED bulb only. It deals in various items i.e. CFL, GLS Bulb, PL, Reflector Bulb, Infrared Bulb etc. which are traditional product where there is lot of competition and the margin is much less as compared to the LED bulb which was a new and innovative product at that point of time. This is also evident from the list of inventory mentioned in the tax audit report. Secondly, the turnover of M/s Fairdeals is Rs. 443 lacs whereas assessee's turnover is only Rs. 85 lacs that too mainly of semi-finished goods. Thirdly, application of consolidated N.P. rate is not justified in as much as the purchase/sale transaction with M/s Fairdeals relates to the trading account only and there is no expenditure relating to the assessee which is incurred by M/s Fairdeals. Moreover, due to the large scale o....
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....to the last year. Reliance in this connection is placed on the following cases:- 1. CIT Vs. Delhi Press PatraPrakashan(2013) 355 ITR 0001 (Delhi)(HC) [PB 73-80] 2. Honeywell Automation India Ltd. Vs. DCIT (2015) 43 CCH 0371 (Pune)(Trib.) [PB 81-83] 3. A.T. Kearney India Pvt. Ltd. Vs. ACIT (2014) 41 CCH 0418 (Del)(Trib.) [PB 84-90] 4. Aquila Software Service Hyderabad (P.) Ltd. Vs. DCIT 42 ITR (Trib.) 0630 (Hyd.) (Trib.) [PB 91-95] 4. It is further submitted that the application of the combined net profit rate of 7.12% applied by the AO for determining the profit of the assessee is grossly incorrect and unjustified. It may be noted that the assessee is debt free concern and has small administrative set up whereas M/s Fairdeals has significant debts and a bigger administrative set up. M/s Fairdeals, therefore, has to incur the interest cost and the higher administrative cost. The interest paid by M/s Fairdeals is Rs. 25,50,283/- (including interest paid to partners) and the administrative expenses incurred is Rs. 59,72,414/-. As against this assesse has not incurred any interest cost and the administrative expenditure incurred by it is onl....
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....s its sister concern M/s Fairdeals are dealing in the same nature of business i.e. trading and manufacturing of electrical bulbs, CFL, LED lights and their components. During the year, assessee has purchased almost 65% of raw materials from its sister concern M/s Fairdeals and all the finished goods were sold to them. The assessee has shown a net profit of Rs. 37,19,701/- giving n.p. rate of @43.50% on the turnover of Rs. 85,50,789/- whereas M/s Fairdeals has shown a net profit of Rs. 41,954/- on the turnover of Rs. 4,43,02,101/- giving n.p. rate of 0.094%. The AO, therefore, applied the provisions of section 80IA(10) and proposed to estimate the net profit of the assessee firm by applying the combined net profit rate of 7.12% declared by the assessee and its sister concern. Accordingly, he applied the consolidated net profit rate of 7.12% on the turnover of the assessee as against the net profit rate of 43.50% declared by the assessee and determined the net profit of the Baddi unit at Rs. 6,08,816/- and restricted the claim of deduction u/s 80IC to that extent as against Rs. 36,15,771/- claimed by the assessee resulting into disallowance of claim of deduction u/s 80IC by Rs. 30,06....