TaxTMI 
TaxTMI 
2025 (6) TMI 1318
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....tal income at INR 61,96,19,943/- instead of INR 56,80,38,778 for which the correct working of revised taxable income is given as "Annexure-A". 2) The learned NeAC officer erred in computing INR 10,98,72,843/- as "more than the ordinary profit" on Specific Domestic Transition (SDT) for the unit of the assessee entitled to deduction u/s 10AA and while doing so: a) The learned JAO erred in making reference to the learned TPO u/s 92CA(1) by invoking provisions of section 80IA (10) without determining and establishing the existence of an arrangement between the concerned parties which results in more than ordinary profits and therefore the whole proceedings initiated under Transfer Pricing provisions is bad in Law and the Learned NeAC officer, Learned TPO and also Hon'ble DRP further erred in not considering the objection of the appellant in this regard and thus erred in confirming the action of the Learned JAO. b) The Learned TP Officer and Learned NeAC Officer (Based on order of Hon'ble DRP) erred in rejecting the arm's length operating profit (OP) computed by the appellant and re-computing arm's length operating profit (OP) as under: Operating Profit computed b....
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....tion of reasonable Return on Capital Employed. c) The Learned TPO and Hon'ble DRP erred in considering practical example given by the appellant to prove that arm's length OP @ 2.13% / 2.56% will result into abnormally low net profit/taxable profit (working given as "Annexure B-Taxable Profit" and thus further erred in: i) Not considering the fact that OP of 2.13% is not viable economically, the learned TPO failed in his basic duty of considering alternative to determine a fair normal profit for the units established in SEEPZ-SEZ and thereafter consider the efficiencies of the assessee to determine the Normal Profit. 4) Not considering the request of the appellant that the preliminary enquiry he made in the various TP Commissionerate in Mumbai to gather data of similar cases engaged in the same business and environment which are under consideration for assessment during this year and past 2 years and such data be also used to calculate average profit because such data will be easily available to the officers in TP section. The Ld. NeAC has erred in computing the tax on income of INR 70,34,68,810/- instead of assessed income of INR 56,80,38,778/-. The appellant craves....
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....ted that AO has erred in making reference to TPO by invoking provisions of section 80IA(10) without determining and establishing existence of an arrangement between the concerned parties which results in more than ordinary profit and therefore, whole proceedings initiated under transfer pricing provisions is bad in law. The assessee is also stated that AO referred the matter to TPO in respect of SDT without demonstrating that business affairs of the assessee with the closely connected entity has been so arranged having risen to more than the ordinary profit of the assessee. The assessee by refereeing sub-section (10) of section 80IA submitted that such section casts responsibilities upon the AO to demonstrate that business affairs of the assessee with the closely connected entity have been so arranged even raised to more than ordinary profit to the assessee, which is missing in the assessment and TP proceedings, and determine what is normal profit. The AO has not discharged his duty by demonstrating the existence of such arrangement. The proviso to section 80I(10) states that in case the aforesaid transaction involves SDT, the amount of profit from such transactions shall be determ....
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....to the department without detailed scrutiny. On the basis of aforesaid submissions, the assessee submitted that profit of assessee is consistent with the period of tax holiday as well as non-tax holiday. The DRP after considering the submission of assessee held that TPO has dealt this issue and address that being controlled transaction; this cannot be taken as bench mark. Transfer pricing analysis is done with the help of uncontrolled transaction. The DRP agreed with the stand of TPO that business contention vary from year to year and margins of comparable of current year or the weighted average of three years should be taken rather than figures of later years. The transactions of assessee are with the related parties cannot be considered as uncontrolled transactions. On the reliance on CBDT Circular No.2 of 2008, the DRP held that such Circular is applicable for assessment made during FY 2008-09 and not applicable for AY 2021-22. 7. On the objection against downward adjustment of Rs. 11.62 crore. The assessee stated that TPO erred in considering inappropriate comparables and rejecting/ suggested comparables based on filters and thereby applying filters in a mechanical manner, le....
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....n of section 10AA is availed. If the assessee has declared operating profit of 2.00 to 2.50%, in subsequent years, resulting into net profit of 1.00 to 1.50% such result will not pass test of assessment scrutiny. The assessee also objected to the inclusion of inappropriate comparables and rejecting of appropriate comparables. Objection of assessee to inclusion of inappropriate comparables and rejecting of appropriate comparable are recorded at page no. 18 to 24 of order of DRP. The assessee also objected that comparables mentioned in show cause notice and finally considered for benchmarking are inappropriate when compare to business of assessee as limited data is available. Such objections of assessee are recorded at page no. 25 to 28 of order of DRP. The DRP on considering the aforesaid objection recorded that assessee has benchmarked its transaction of sale of Jewellery to its AE by using TNMM method and arrived at net margin of 10.02%. The TPO applied various filters like turnover filter, export filter and RPT filter, removed/ excluded following seven comparable. i) Uni Design Jewellery Pvt. Ltd. ii) Jewelex India Pvt. Ltd. iii) Uni Design Elite Pvt. Ltd. iv) Goldiam In....
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....issue on account of TP adjustment is Rs. 11.62 crore, thus, total income determined Rs. 62.59 crore. This is high handed approach of AO in making addition of Rs. 11.62 crore to the taxable income instead of reduction of Rs. 11.62 crore from profit of unit for recomputing deduction under section 10AA. The assessee explained that they have given working to the JAO that total return income of assessee is of Rs. 50.97 crore, the assessee claimed deduction of Rs. 8.38 crore, thus, revised return before deduction under section 10AA is Rs. 59.35 crore and income entitled for deduction under section 10AA as per ITR is Rs. 16.77 crore, and if the proposed variations as suggested by TPO of Rs 11.62 crore is reduced, revised income eligible for deduction under section 10AA is Rs. 5.15 crore. Export turnover of unit is Rs 171.78 crore, total turnover of the unit is Rs. 173.20 crore, revised profit eligible for deduction under section 10AA is Rs. 5.11 crore, thus, deduction under section 10AA being 50% of Rs. 5.11 crore, would be 2.55 crore. As return of income of assessee before claiming deduction under section 10AA is Rs. 59.35 crore and revised deduction (Rs. 2.55 crore) thus revised taxable....
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....nit in SEZ purchased cut and polished diamond mainly from another unit located outside SEZ. On reporting SDT on account of sale of Jewellery to its AE, the Jurisdictional Assessing Officer (JAE) made reference to TPO on reporting such transaction in Form 3CEB explaining the fact that profit earned from sales to such parties are not more than ordinary profits. Report in Form 3CEB is filed out of abandoned caution so as to avoid provisions related to non-filing / non-disclosure of transactions under transfer pricing provisions. The assessing officer failed to establish close connection and arrangement of business transaction to produce more than ordinary profit before making reference to TPO. The AO without demonstrating that business affair of assessee with the closely connected entity has been so arranged giving rise to more than ordinary profit to the assessee. The ld. AR of the assessee by referring provisions of section 80IA(10) submits that plain reading of this section prescribed that first the AO has to establish, close connection between the assessee and the other person and having established close connection he has reason to believe that business transaction is so arranged....
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....count of TP adjustment is Rs. 10.98 crore, thus, total income determined. The AO made addition of Rs. 10.98 crore to the taxable income instead of reduction of Rs. 10.98 crore from profit of unit for recomputing deduction under section 10AA. The assessee explained that they have given working to the JAO that total return income of assessee. And if the proposed variations as direction of DRP Rs 10.98 crore is reduced, revised income eligible for deduction under section 10AA would be reduced. The assessment order is not passed as per the direction of DRP, therefore, same is also liable to be quashed / set aside. 19. On the other hand, the learned Senior Departmental Representative (ld. Sr. DR) for the Revenue supported the order of lower authorities. He submits that as per proviso to section 80IA(10) if the assessee made a specific domestic transaction as referred to in section 92BA, the amount of profit from such transaction shall be determined having regard to arm's length price as defined in 92F(ii). The DRP in para 6.3.2 as specifically held that Circular No. 3 of 2016 prescribed the procedure for reference to transfer pricing adjustment. The TPO carried out transfer pricing adj....
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.... gains from industrial undertakings after a certain dates etc) (1) xxxx ***** (10) Where it appears to the Assessing Officer that, owing to the close connection between the assessee carrying on the eligible business to which this section applies and any other person, or for any other reason, the course of business between them is so arranged that the business transacted between them produces to the assessee more than the ordinary profits which might be expected to arise in such eligible business, the Assessing Officer shall, in computing the profits and gains of such eligible business for the purposes of the deduction under this section, take the amount of profits as may be reasonably deemed to have been derived therefrom: Provided that in case the aforesaid arrangement involves a specified domestic transaction referred to in section 92BA, the amount of profits from such transaction shall be determined having regard to arm's length price as defined in clause (ii) of section 92F. 21. A careful reading of definition of SDT prescribed in section 92BA makes it clear that there must be a transaction, it is not an International Transaction within meaning of 'International Tr....
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....ght have been ordinarily expected to earn from such business. Pune Tribunal in DCIT Vs. Halliburton Technology Industries Pvt. Ltd. (supra) by relying upon the decision of Bombay High Court in Schmetz India Pvt. Ltd. (supra) held that when AO was not able to prove that there was an arrangement between the assessee and its parent company resulting into extra ordinary profit, and the assessee had concentrated on export to its parent company, only which had resulted in higher profit. The AO has not demonstrated any proof of arrangement for disallowance under the provisions of section 10B(7) r.w.s. 80IA(10) for which judicial pronouncement made it mandatory. Further coordinate bench of Delhi Tribunal in Mankind Pharma Vs DCIT (supra) on relying the decision of Delhi High Court in CIT Vs. Schmetz India Private Limited (supra) also held that eexistence of an 'arrangement' is a condition precedent to trigger provisions of section 80IA(10) and in its absence, business transacted between eligible units and its AE do not get covered within ambit of Specified Domestic Transactions (SDTs) defined under section 92BA and eventual TP analysis. 23. On considering the aforesaid decision we....