AI Drafter 
TaxTMI 
TaxTMI 
2021 (7) TMI 750
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..... 12,51,67,670/- was claimed as deduction under Section 10-B of Income Tax Act, 1961 (hereafter referred to as Act) in respect of the net profit of Rs. 13,05,22,622/03. The return was processed under Section 143(1) which resulted in a refund of Rs. 9,070/- and the same was granted. Subsequently, the case was selected for scrutiny and notices under Sections 143(2) and 142(1) of the Act were issued. The Assessing Officer made a reference to the Transfer Pricing Officer to determine the Arm's Length Price (ALP) under Section 92(A)(1). Consequently, based on the Transfer Pricing Officer's order dated 15.12.2006, the assessment was completed under Section 143(3) of the Income Tax Act and the Assessing Officer had determined the taxable income of the Company for the Assessment Year 2004-2005 at Rs. 4,06,01,372/- by restricting the deduction claimed under Section 10-B to Rs. 8,97,67,670/-. The Assessing Officer had disallowed Rs. 3,54,00,000/- and treated the amount as deemed income under the head "Other Sources". This was also based on a written admission by the assessee. The Assessing Officer also concluded that out of the total turn over of Rs. 15,06,43,051/-, income of Rs. ....
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....the decision of the Commissioner of Income Tax (Appeals) on three counts. a) The decision of the Commissioner of Income Tax (Appeals) in not accepting the revised calculation of excess of profits over the arms length price and brushing it aside as an 'after thought' as the actual figure was only US $ 1,85,702 (about Rs. 1.29 Crores) and not Rs. 3.54 Crores as admitted earlier by the assessee earlier, is illogical. b) The assumption of the Assessing Officer that the assessee Company and the importer of the goods are closely associated and had arrangements to make more than ordinary profits was without any evidence and had no rationale. The decision of Commissioner of Income Tax (Appeals) to direct the Assessing Officer to rework the excess profits by treating the amount of Rs. 3.54 Crores as turnover and applying 83.1% (profit margin) on Rs. 3.54 Crores to be deducted under Section 10-B, was arbitrary and without any convincing reason. c) The decision to disallow the income from the sales of scrap was also wrong as it was purely a business income and entitled for deduction under Section 10-B. 4.The Revenue in its appeal had contended that ....
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....tances of the case, the Income Tax Appellate Tribunal was right in law in allowing the incorrect exemption under Section 10(7) of the Income Tax Act, 1961, as determined under Section 92CA (3) of the Income Tax Act, even though the Appellate Tribunal, on the basis of the materials available on record, ought to have set aside the assessment order to the assessing officer / Transfer Pricing Officer to expand the scope of comparable uncontrolled price for finding the new Arms Length Price? Additional Substantial Questions of Law in TCA 1253/2010: i. Whether on the facts and in the circumstances of the case the Tribunal was right in not considering and appreciating that the assessee had agreed and admitted to the excess export profit before the TPO with reasons and explanations and the Assessing Officers had assessed the said admitted excess export profit for exclusion from exemption u/d 10B r.w.801A. ii. Whether on the facts and in the circumstances of the case the Tribunal was not perverse and right in holding that the assessing officer had to substantiate the basis of excess export profit agreed and admitted by the assessee and failure of the assessing officer t....
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....ansfer price) which is arbitrary and dictated (Rs. 200/-) but not on the market price (Rs. 400/-). Thus the effects of transfer pricing is that the parent company or a specific subsidiary tends to produce insufficient taxable income or excessive loss on a transaction. For instance, profits accruing to the parent company can be increased by setting high transfer prices to siphon off profits from subsidiaries domiciled in high tax countries, and low transfer prices to move profits to subsidiaries located in low tax jurisdiction. b) Arms length Price (ALP) means a price which is applied or proposed to be applied in a transaction between persons other than associated enterprises, in uncontrolled conditions. In other words, it is the price at which a willing buyer and a willing unrelated seller would freely agree to transact or a trade between related parties that is conducted as if they were unrelated, so that there is no conflict of interest in the transactions. Both parties in the deal are acting in their own self interest and are not subject to any pressure or duress from the other party. Section 92-F of Income Tax Act, 1961 defines ALP as the price applied (proposed to be ....
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....t upon the correct comparables to decide about the Arms Length Price and its fairness. The appellant company had not been in a position to pinpointedly bring comparables either in India or elsewhere in any part of the world to show that the rates at which it had sold to the Associate concern were reasonable and were comparable with the rates at which similar products were sold by other concerns located in India or even anywhere in other parts of the world. In fact, the appellant company itself had come upon a German concern which had been producing and marketing products similar to that of the appellant company and further, the company itself had arrived at an excess profit of Rs. 3.54 Crores by adopting the results of the German firm. Having accepted the close connection between the appellant company and the other concern in the US, the question to be decided is whether the rate at which the company had sold its products to the US firm was exorbitantly high just because it enjoys exemption from taxation of its profits u/s 10B and on the other hand, the profits were siphoned off by the other firm or the profits were taken back by the other concern in some way or the other.....
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....ad sold to other customers who were not connected with it and compared the rates at which it had sold to its Associate concern with the rates at which it had exported to other customers it would have amounted to it having fully discharged its onus. That is, if the appellant company were in a position to show that the rates at which it had sold the products to other customers are the same rates at which it had sold to its Associate concern, then, it would have amounted to the appellant company having discharged its onus. But, there is no such occasion that the company could find. In view of the foregoing discussions, it is held that the impugned order need not be interfered with and the same is confirmed in toto.'' 9.On the same aspect, the Income Tax Appellate Tribunal had a different view point. The Income Tax Appellate Tribunal in its order had observed thus. " We have considered the rival submissions. A perusal of the order of the TPO for the relevant assessment year shows that the TPO has verified the arms length price and has confirmed that no adjustment on account of transfer pricing was required to be made. The provisions of transfer pri....
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....income of an associated enterprise is not reduced by shifting its income to the eligible business. However, he has given a further fact in his order that the PLI of the assessee is higher than the mean of the PLI of the comparable cases. .....At the time of hearing, the Id. DR was vehemently of the view that the transfer pricing action by the TPO at the behest of the Assessing Officer was a separate proceedings and the Assessing Officer while completing the assessment by invoking provisions of Section 10B(7) read with Section 801A(10) was doing an independent action though using the evidence and documents which had been submitted before the TPO. Even if this submission of the Id. DR is accepted, then it becomes incumbent upon the Assessing Officer to specify as to why he feels that the profits disclosed by the assessee is higher than the ordinary profits which might be expected to rise in the assessee's business. The provisions of section 801A(10) does not give an arbitrary power to the Assessing Officer to fix the profits of the assessee. The Assessing Officer has to specify as to why he feels that the profits of the assessee is being shown at an hig....
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.... he had blindly taken a calculation which the assessee has given before the TPO which the assessee himself had admitted to be erroneous and the errors have been corrected and fresh calculations given. 11.The Commissioner of Income Tax (Appeals) believed the contention of the Assessing Officer that the two firms that is the exporter in India and the Importer in the USA were closely associated with common shareholder and substantial profits of the Indian Company were siphoned off by him and that there was certainly loss to the Revenue under the Indian Income Tax Act, and the Assessing Officer in this regard was categorical when observing as under. "These provisions are intended to plug the undue claim of exempted income by resorting to super profit arrangements. It is not necessary that both the closely connected persons must be assessed in India. The Act did not mean to specify that this Section be applicable in the case of closely connected persons who are assessed in India. Since the super profit was possible and realisible between Indian persons with any other Indian or Non- Indian persons, the Section 10B(7) itself so states as "any person who is closely connected on....
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....td., and another Delhi based M/s.Rahul Electricals and Electronics and the excess profit so arrived was much higher at Rs. 5.18 Crores. 14.Per contra, Mr.Srinath Sridevan, learned counsel for the assessee was of the view that the three important ingredients of Section 80-1A(10) were not established by the Revenue and therefore, the power under this Section cannot be invoked. The three ingredients were a) the assessee must be in an eligible business b) Assessee must have a transaction with a related entity c) Assessee and the related entity must deliberately organise their affairs so as to generate profits which are more than ordinary profits being earned in the line of business. The onus being on the Revenue, it was contended, the same was shifted on the assessee by the Revenue. 15.Mr.J.Narayanaswamy, learned Senior Standing Counsel for the Revenue, per contra, argued that the product itself had no comparables and the one which was compared i.e., M/s.Rahul Electricals and Electronics, New Delhi was much less to the assessee company in terms of the turnover as contended by the assessee. In fact, it was argued, that the excessive profits over the Arm&....
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.... an associate enterprise is compared with net profit margin of uncontrolled transactions to arrive at arm's length price. 17.As already pointed out the superiority of any particular method to arrive at the ALP is ruled out. The TPO and the Assessing Officer had accepted the assessee's own written submissions and determined the excess profit at Rs. 3.54 Crores which was the result of the CUP method worked out by the assessee. It is not true that the TPO / Assessing Officer did not make any spade work to arrive at the ALP. The products manufactured by the assessee was exported exclusively only to the importer Company in U.S. M/s.Tweezerman Corporation. The sister concern of the assessee company M/s.Ital Beauty Nippers Pvt. Ltd., is also in the same line of activity and has a common shareholder. The only difference is that the common shareholder, between the M/s.Tweezerman Corporation US and the M/s.Tweezerman India Pvt. Ltd., is a foreigner while that between M/s.Tweezerman India Pvt. Ltd., and M/s. Ital Beauty Nippers India Pvt. Ltd., is an Indian shareholder. The TPO / Assessing Officer had employed the TNMM method and the excess profit so arrived was Rs. 5.18 Crores. Bu....
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....tz even though he is with you for Tweezerman India which also comes on top of us." f) One Mr.Da La Magna holds 70% of equity shares in the USA Company M/s.Tweezerman Corporation USA and also 32.5% to 35% in M/s.Tweezerman India Pvt. Ltd., g) The revised calculation submitted by the assessee company was not accepted as it had no actual error in it but contained two new European comparables to arrive at the ALP and therefore considered as an 'after thought' by the Assessing Officer. h) The profit margin for the impugned accounting period was more than 12% of the profit margin of the earlier year. 19.We also find that the CIT(A) in her order had suddenly deviated from her narration of her observation and concluded that "he (Assessing Officer) ought to have excluded only 83.1% of Rs. 3.54 Crores for the purpose of recomputing the deduction under Section 10B". This could have been correct had the TNMM method been followed. But Rs. 3.54 Crores was determined based on the CUP method employed by the assessee based on the comparables in the German market. The CIT(A) after holding that "the impugned order need not be interfered with and the same is co....