TaxTMI 
TaxTMI 
2026 (4) TMI 1640
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....n comparing and adopting net profit margin of sister concern Pragati Aroma Oil Distillers Pvt. Ltd. (as existed during the relevant Assessment Year), even in the absence of any arrangement as contemplated in Section 10B (7) read with section 80IA (10) of the Income Tax Act, 1961?" 3. The appellant is a private limited company incorporated under the Companies Act, 1956, engaged in the manufacture and export of perfumery compounds and essential oils. The appellant was originally known as M/s. Hindustan Essential Oil Company and was later converted into a private limited company. With effect from 1st April 2009, the company was amalgamated with Pragati Aroma Oil Distillers Private Limited. For the purposes of this appeal, "the appellant" refers to M/s. Hindustan Essential Oil Company. 4. In Financial Year 2002-03, the Appellant had set up a new 100% Export Oriented Unit ("EOU", for short) at Nilakottai, Tamil Nadu for producing perfumes/fragrances. Deduction was claimed by the appellant on the profit of the said unit. During the previous year 2008-09, the appellant had claimed a deduction of an amount of Rs. 2,32,48,056/- under section 10B of the IT Act. 5. The appellant file....
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....y the sister concern Pragati Aroma Oil Distillers Pvt. Ltd. (as existed during the relevant AY), having same activity, excluding foreign exchange gain if any, against Rs. 2,32,48,056/- as claimed by the appellant on the profit of EOU, as profit reasonably deemed to have been derived from the unit for the purpose of deduction under Section 10B of the IT Act and remaining profit shall be liable to be taxed as per normal rate of taxation. 9. Aggrieved by the order of the CIT(A) dated 31st December 2012, the appellant filed an appeal with the ITAT. The ITAT, vide order dated 25th November, 2014 dismissed the appeal of the appellant, recording that the contention of appellant that no comparable case was examined by the AO has no merit as it has been noted that on asking of the AO, the appellant furnished the GP/NP of the last three years of the sister concern and found that in the instant year the net profit earned by the sister concern itself was 19.03%, which led the ITAT to the conclusion that the appellant had disclosed profit in excess of what could be reasonably expected. 10. Aggrieved by the ITAT order dated 25th November, 2014, the present appeal was filed, challenging the....
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....the context of the applicability of Section 80-IA(10), the ITAT has rightly applied the said section by observing that the Assessee and Pragati Aroma Oil Distillers Pvt. Ltd. shared a close relation, being regulated under the same management and dealing in the same business and that, as such, the course of business was so arranged that the business transaction between them produced more than ordinary profits. (ii) That, mere absence of a formal or written arrangement between the parties would not render Section 80-IA(10) inapplicable, considering that what has been contemplated under the said section is that the course of business must be so arranged that the business transaction between them produces profits to the assessee that are more than what may be ordinarily expected to arise in such eligible business. 13. Heard learned counsel for the parties. 14. Section 10B of the IT Act provides incentive to promote exports by granting tax benefit to 100% EOUs. Section 10B of the IT Act reads thus:- "SECTION 10B(1) Special provisions in respect of newly established hundred per cent export-oriented undertakings. 10B. (1) Subject to the provisions....
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.... (2) of section 80-I shall aply for the purpose of clause (iii) of this sub-section as they apply for the purposes of clause (ii) of that sub-section." 15. Section 80-IA(10) empowers the AO to recompute the profits if there appears to be a close connection between the assessee and another entity and such connection produces more than ordinary profits. It is an anti-abuse provision to prevent assesses from seeking deduction on artificially inflated profits. For the facility of convenience, Section 80-IA(10) has been extracted below:- "80-IA Deductions in respect of profits and gains from industrial undertakings or enterprises engaged in infrastructure development, etc. (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 su....
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.... assessee and its sister concern were in the same line of business under common management, and that the assessee had disclosed higher profits. The ITAT therefore upheld the approach of the CIT(A) in using the sister concern as a benchmark and sustained the restriction of profits to about 19%, holding the adjustment to be reasonable and justified. 20. In our considered opinion, the ITAT has failed in giving any categorical finding as to the arrangement between the parties that led to the inflation of profits beyond what could have been ordinarily expected. The deduction was restricted by the ITAT solely on the ground that the net profit rate of the assessee operating in the export market at 25.09% was higher than that of its sister concern operating in the domestic market, having a net profit of 19.55%. In Commissioner of Income Tax-7 vs. Schmetz India (P.) Ltd. (supra) this Court held that extraordinary profits alone cannot lead to the conclusion that there is an arrangement between the parties as this would penalise efficient functioning. The paragraph No.8 of the decision is quoted below for ready reference:- "8. So far as questions (a) & (b) are concerned, we find t....