TaxTMI 
TaxTMI 
2025 (6) TMI 1318
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.... (addition) of INR 10,98,72,843/ to compute the total 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....
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....omparison with other entities as the same will have bearing because of: i) High Working Capital requirement for this business and, ii) Expectation 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 availabl....
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....rved on the assessee. The assessee exercised its option for filling objection before Dispute Resolution Panel (DRP). 4. Before the DRP the assessee file detailed written submission. The assessee before DRP submitted 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 dischar....
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....applying profit margin of other parties, who operates in altogether different business. The assessee by referring the CBDT Circular No. 2 of 2008 submitted that net profit in the diamond trade is at 6.00% is acceptable 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 do....
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....ting profit around 2.50%, which is near to proposed operating profit of 2.13%. It was submitted that operating profit of 8.00 to 11.00% as well as net profit from SEZ unit every year including in the years, when no deduction 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 vario....
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....to the total income on the report of TPO as additional income, instead of considering TP adjustment as amount to be reduced from profits of undertaking enjoying deduction under section 10AA and thereafter compute revised amount of deduction under section 10AA. The assessee explained that they have returned income of Rs. 50.97 crore, variation in respect of 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....
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....19,943/- 15. Aggrieved by the additions in the assessment order the assessee has filed present appeal before Tribunal. 16. We have heard the submissions of learned authorized representative (ld AR) of the assessee and the learned Senior departmental representative (Sr DR) for the revenue and have gone through the orders of lower authorities carefully. The ld AR of the assessee submits that manufacturing unit of assessee is situated in SEZ. The unit 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 af....
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....as part of her submissions. 18. In other without prejudice and in alternative submissions the ld. AR of the assessee submits that JAO has not passed final assessment order as per direction of DRP. The DRP in its direction direct the assessing officer to revise the adjustment figure. The ld. AR of the assessee submits that assessee has given working of revised taxable income and after exclusion of Neysa Jewellery Ltd. variation in respect of issue on account 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 o....
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....the assessee and other person as referred to in sub-section (10) of section 80-IA; (v) any transaction, referred to in any other section under Chapter VI-A or section 10AA, to which provisions of sub-section (8) or sub-section (10) of section 80-IA are applicable; or (vi) any other transaction as may be prescribed, and where the aggregate of such transactions entered into by the assessee in the previous year exceeds a sum of Rs. 20 crore." Section 80IA (deduction in respect of profit and 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....
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....Bom) held that where the AO has not been able to prove any arrangement between parties which resulted extraordinary profit, denial of deduction under section 10A is not possible. Similar view was taken by Rajasthan High Court PCIT Vs. Vedansh Jewels Private Limited (2018) 97 taxmann.com 521 (Raj). Karnataka High Court in CIT Vs. H.P. Global Soft Ltd. 342 ITR 263 (Kar) also held that there should be material to indicate that assessee had indulged in arrangements with other person so as to give more profit to the assessee than what the assessee might 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 ....